Correct. It was HMRC’s Chris Martin (who was propelled into the spotlight when Harry Redknapp and Milan Mandaric were found not guilty of tax evasion) putting a good spin on a rather embarrasing defeat.

It would be rather pointless to recap the events of this rather well publicised trial.  But what might be more interesting is to think about what this means to other tax payers.

First if you are a sportsperson then it’s probably good news.  My understanding of the oft mentioned £8m campaign was that it related to the whole operating to look into fraud in sport (not just Redknapp’s trial).  I also understand that it has led precisely nowhere.  If anyone from the Met is reading this, feel free to set me straight.  So politically, and economically, it seems that this campaign might be over faster than you can say “transfer fee”.

If you are a tax evader, it probably makes no difference.  I’ve not yet read the full case report but if HMRC can’t prove tax evasion then they won’t get very far.  I don’t want to do their work for them, but HMRC’s powers to get information from offshore tax havens is always increasing and the UK has entered into a number of Tax Information Exchange agreements that greatly assist in tracking down fraudsters.  If you are one of those, then Chris Martin (not that Chris Martin – the one at the start of the blog), is probably right.  There are a number of disclosure facilities which may result in a reduction in any penalties and it is worth speaking to an expert before turning yourself in!

There is nothing wrong per se in having bank accounts in tax havens, provided that you make sure that any tax planning is done properly.

If you are expecting a bonus, I also wouldn’t take this as carte blanche to become friends with your boss and ask for some seed money for your investments.  The law hasn’t been changed by this judgement – a bonus is still taxable, and it will be a question of fact as to whether or not a payment is a bonus.  The assumption should generally be that it is taxable, and any derogation from this would require professional advice.

There are also a lot of rather more “vanilla” and rather more tax efficient ways of motivating employees such as share options, which should be considered before paying sums into bank accounts in Monaco in the name of your dog!

If you would like to discuss any of these points, please contact our wealth management or employment teams.

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.

We now hear that the Chancellor has ordered an investigation into how much the tax brings into the national coffers. HMRC has been told to report back by January.

This shows us the power of the people (well, a very select group of the people) to get the Government to take action.  Or does it?  The Chancellor has done nothing but buy himself some time here. 

Time to think has to be a good thing, and it is commendable that there hasn’t been another knee jerk reaction of “yes” or “no”.  What is glaringly obvious, to me, is that whilst economists may be in a position to opine as to how measures such as the 50% rate of tax affect the economy, this is only part of the picture.

The other part is politics; and it is the politicians who are responsible for making changes.  The damage which could be done in being seen to favour the rich at a time when unemployment is high and growth is flat lining means that the merits of the 50% rate are of secondary importance to “how it looks”. 

Just listen to the news and take note of how often you hear the phrase “send a message”.  Policy seems to be more about messages sent than the merit of the measure. 

I fully expect that when the Revenue report back on this next year, the results will not show a strong case for the 50% rate.  I’ve helped enough clients to shape their affairs to reduce the impact of the 50% rate to form my own view on the matter. 

Whatever the outcome of this review, my personal opinion of this is that it won’t matter.  It’s the politicians that shape the policy.  Call me cynical if you will, but the bottom line is that any changes made by politicians are going to be based more on politics than economics

The right for a shareholder of a company to bring an action for unfair prejudice has been the subject of many cases over the years. This right allows a shareholder to bring an action on the ground that:

- the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or some part of its members (including at least himself); or

- an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

A member of a limited liability partnership (LLP) is also entitled to bring an action for unfair prejudice but, as the LLP is a relatively new form of legal entity, there is limited case law on unfair prejudice actions in respect of LLPs.

Case

A recent case has considered a number of preliminary issues in an action alleging unfair prejudice in a LLP. The judge answered the preliminary issues in favour of the member bringing the action. The judge’s comments included:

- as there was no written LLP agreement, there was no express power to expel a member;

- despite one of the members considering himself as the “boss”, in the absence of a written LLP agreement, he was not entitled to a higher return; and

- the exclusion of a member from the management of the LLP was one of the clearest examples of unfairly prejudicial conduct.

Comment

This case is interesting because it shows the application of an unfair prejudice action in the context of a LLP.

The case also highlights the importance for the members of a LLP to put a written members’ agreement in place. Without a written agreement, default statutory provisions will apply to the LLP which means, for example, that all members are entitled to an equal share of profits and to be involved in the management of the LLP. It is unlikely that such default provisions will be appropriate for all LLPs. It is also possible for a members’ agreement to disapply the statutory right for a member to bring an unfair prejudice action.

Eaton v Caulfield [2011] B.C.C. 386

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.

Hedgehog previously had two directors, FH and another. Due to contentious previous court proceedings between the directors, in which certain orders were made against FH, FH had resigned his position as a director of Hedgehog, leaving the other director as sole director.

Another company had brought a patent infringement claim against the golfing device developed by Hedgehog. A consultant of Hedgehog gave evidence to the High Court that FH had made threats in relation to proposals FH had made to Hedgehog, such that if the proposals were not accepted he would not only stop assisting Hedgehog in its defence of the patent infringement claim, but he would actually offer his services to the other company’s patent attorneys.

The consultant also gave evidence that FH had threatened to publicly announce the limitations of Hedgehog’s registered patent, allowing competitors to take advantage of its shortcomings.

The High Court ruled that it was appropriate to grant Hedgehog a perpetual injunction to prevent FH from disclosing confidential information without Hedgehog’s consent. The High Court ruled that FH’s previous conduct showed that he had intended to damage Hedgehog’s business by releasing information that would prejudice the business, and that he had also intended to reveal information that could put him in breach of the previous orders that had been made against him in the contentious proceedings with Hedgehog’s director.

The study (the Truth about Bonuses) by the University’s School of Economics involved subjects either being paid a bonus or fined depending on their performance in certain areas.  The results showed that the joint earnings of employers and workers were almost 19 per cent higher when fines were handed out than when bonuses were paid. However, while employers were better off when fines were introduced, workers earned less than in the scenario without fines.

Alternatives to bonuses

So what does work?  I suspect it depends on who you ask.

Employees (especially those in the, ahem, financial services sector) will probably say cash is king, and when it comes to it, a bonus will do nicely, thank you very much.  Now where is the Ferrari showroom?

Employers will often take a longer term approach to incentives and will often prefer employee share schemes and options.  These have the benefit of being tax efficient and of promoting long term commitment to the business since employees will benefit from future growth.

I’ve yet to come across anyone offering employee fines as an incentive and, if my boss is reading this, I am not sure that it would go down well in practice.

If you would like to discuss employee incentives for your business please contact me (for a discussion of tax), or Emma Cameron in our corporate team.

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.

The case in question concerned a guarantee that was so fundamentally flawed and unsuitable for the relevant transaction, that the Court did not have the power to step in and rectify the drafting mistakes. A Court only has the  remedial tools of construing a contract and rectifying obvious errors, in order to give the contract business purpose. However, where there is a genuine dispute over the existence of a guarantee or as to the terms of the guarantee itself, a Court cannot piece together the intention of the parties and create a document for them. That is simply beyond the powers available to the Court.

So, what can we learn from this latest decision? Well, in simple terms, that a party seeking to rely upon a guarantee must ensure it is accurately drafted and contains all the required terms.  Do not leave anything to chance, otherwise there is no guarantee of your guarantee standing up to scrutiny before a Court.

PwC’s annual non-executive director report, which covers the majority of FTSE 350 companies, found that non-executive directors at FTSE 100 companies spent 24 days on company board work in 2010 (compared with just 20 in 2009), with more than half of those surveyed expecting this figure to increase again in 2011.

The increased time demands have been put down to a number of reasons: tougher regulatory requirements for companies, the recession, and even the need to attend occasional board meetings overseas. There is a real risk that if this time burden continues, the role may become less viable in the future, particularly as 45 per cent of non-executive respondents believe that the fees they charge are too low for the work they do (and the time spent doing it.) That said, 63 per cent of respondents also said that the role has actually become more attractive due to its challenging and rewarding nature.

The question that comes out of this report is: can the role of non-executive director be successfully combined with the demands of a full-time job?

The study also found that:

1. For companies, a candidate’s experience and personality are the most important selection criterion when appointing non-executive directors;

2. For candidates who are considering a non-executive position, the quality of a company’s executive directors is the most important factor. This is followed by the quality of the company’s existing non-executive directors, the financial strength of the company, the company’s business strategy, the time commitment required, and the firm’s reputation. Interestingly, fees are the least important consideration (even though 45 per cent of non-executive directors feel they are significantly underpaid);

3. The average pay for a non-executive director in the FTSE 100 is £57,000;

4. Across all non-executive roles, female representation is only 5 per cent in FTSE 100 companies and 8 per cent in FTSE 250 companies; and

5. Only 21 per cent of FTSE 100 companies and 6 per cent of FTSE 250 companies evaluate the performance of their non-executive directors. Also, only one third of FTSE 350 companies have externally facilitated board evaluations every three years, as laid out in Provision B.6.2 of the UK Corporate Governance Code.

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.

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.

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

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 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.

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.

The statutory remedy for a company member who considers that the company’s affairs are being conducted in an unfairly prejudicial manner is contained in section 994 of the Companies Act 2006. This section allows a member to bring an action on the ground that:

• the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or some part of its members (including at least himself); or
• an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

The meaning of “unfairly prejudicial” conduct has been explored and developed by case law. For example, O’Neill and another v Phillips and others [1999] 2 All ER 961 decided that a member of a company will not normally be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. The mere fact that trust and confidence between the parties has broken down is not sufficient.

If a member succeeds in bringing an unfair prejudice action, one of the remedies open to the court is to order the purchase of shares held by certain members of the company by other members.

Case update

A recent case* on unfair prejudice considered the following issues:

• should one party (P) be ordered to buy the shares of the other party (S) or merely agree to do so;
• if an order was made, should the obligation on P to purchase the shares be dependent upon P having the financial means to do so;
• from which date should P be ordered to pay interest to S; and
• on what basis should S’s shares be valued.

The court decided that:

• there ought to be an order for the purchase of S’s shares, as would ordinarily be the case in an action for unfair prejudice;
• there should be no “escape clause” making the order to purchase S’s shares dependent upon P’s ability to pay;
• no interest should be paid; and
• S’s shares should be valued as at the valuation date, not on the date on which S resigned as a director.

Comment

This case is useful as it sets out some of the issues a court will consider when dealing with an unfair prejudice action.

*In the matter of Scitec Group Ltd sub nom Sudhir Sethi v (1) Alpesh Patel (2) Scitec Group Ltd [2010] EWHC 1830 (Ch)

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.

A derivative action is an action brought by a shareholder on behalf of the company. Owing to the complexity of the previous law, very few derivative actions succeeded. When the Companies Act 2006 (2006 Act) came into force, it introduced a wider range of circumstances in which such actions could be brought. A derivative action is now expressly available for a breach of duty by a director, even if the director has not benefited personally from the breach. Furthermore, it is no longer necessary for the shareholder to show that the director(s) who carried out the wrongdoing control the majority of the company’s shares.

Initially, some legal commentators were concerned that activist shareholders would bring such actions simply to disrupt the affairs of the company or make life difficult for its directors.  I initially considered some of the early cases on this new derivative action in January 2010 and concluded that any concerns that activist shareholders would be allowed to use the action frivolously seemed to be unfounded. This was due to the strict application by the courts of the tests set out in the 2006 Act which need to be satisfied before permission to continue a derivative action will be granted.

Since January 2010, permission to continue a derivative claim has been granted in Kiani v Cooper [2010] B.C.C. 463.

Facts of the case

A shareholder (X) sought permission to continue a derivative claim against another director and shareholder (Y) for breach of fiduciary duty.  The court considered various tests as set out in the relevant part of the 2006 Act and decided that, in the circumstances, X was acting in good faith in bringing the derivative action. The court also took the view that a director acting in accordance with his statutory duties to promote the success of the company would decide to pursue the claim, at least to the point of disclosure in the court proceedings.  The court therefore held that X had made out a case for breach of fiduciary duty by Y to the relevant standard and allowed the derivative claim to be continued to the point of disclosure.

Comment

This case demonstrates that it is possible for a shareholder to succeed in a claim for permission to continue a derivative action. However, the fact that the court only granted permission to the point of disclosure indicates that the courts will still apply a strict interpretation to the tests set out in the 2006 Act.

• 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.

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.

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 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

I will be celebrating the Year of the Tax Hike, which is due to start on 6 April.

Anyone with a better name, please share your wit and wisdom by emailing me or commenting on this post with suggestions. There is no prize (times are tight, you know) but you will benefit from the kudos that attaches to such things…

The year of the Tiger signifies bravery. The year of the Tax Hike signifies increases in tax for individuals with income over £150,000 and for trustees (whatever the trust’s income); and the gradual reduction in personal allowances for those with income over £100,000. And the year after, NICs will be increased by 1%.

What to do?

There are several ideas which can be utilised to reduce the impact of these changes. These can be summarised as follows:

Accelerate

Income (e.g. bonuses or dividends) which would otherwise have been paid in 2010 / 2011 might be brought forward to this year (i.e. before 6th April). You will still suffer tax but this simple step will give rise to tax of 40% rather than 50%. The employer will need to agree to this, since it will also need to pay PAYE and employers NICs earlier than possibly anticiapted. If your employment status is tenuous, don’t expect your employer to agree….

Defer

You may want to defer allowable expenditure and reliefs until next year. Alternatively defer might mean hold off on making payments out of companies until tax rates reduce. This is only suitable for owner managed businesses and will need to be kept under review.

Restructure

There are tax efficient structures which can be utilised to reduce overall rates of tax. These should only be undertaken with proper professional advice. Some of these are quite strightforward such as careful use of tax approved employee share incentives, e.g. EMI options. Another well trodden path is to address the balance between spouses, when one spouse or civil partner will be a 50% taxpayer and the other will pay tax at a lower rate. Income producing assets can generally be transferred between spouses with no capital gains tax or inheritance tax implications but often the income tax benefits are surpising.

Invest

The EIS and VCT schemes (possibly combined with pensions planning) can be used to reduce your effective rate of tax. This is only of use if you have cash to invest. Further, you will need to take proper investment advice to ensure that a particular investment is suitable for you. Note, some providers offer “protected” EIS and VCT investments with a lower risk profile.

Watch this site for some more ideas on how to beat the tax man and steps which should be considered before we usher in the new year.

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.

The claimant (Invertec) and the first defendant (De Mol Holding BV (DMH)) entered into a sale and purchase agreement for the sale by DMH to Invertec of all of the issued shares in Volante Public Transportation Interior Systems Limited (Volante).

After the sale, Invertec had to inject cash into Volante to pay outstanding debts (including debts owed to suppliers and HM Revenue & Customs). Invertec claimed that it had been induced to purchase Volante by a number of representations made by DMH and its director as regards Volante’s solvency, management accounts, corporation tax liabilities and a customer contract. These representations had been given both during the course of negotiations and as warranties in the sale and purchase agreement. Invertec alleged that DMH had given the representations fraudulently and breached the warranties in the agreement.

As is normal in private company sales, DMH had provided Invertec with a disclosure letter setting out details of matters which were inconsistent with the terms of the warranties so as to protect DMH from being sued by Invertec as regards any such disclosed matters.

Decision

The High Court found that DMH had given the representations fraudulently and breached the warranties in the sale and purchase agreement.  However, Invertec did not succeed with its claim that a fraudulent misrepresentation was made as regards the customer contract because DMH had disclosed that the contract was loss-making in the disclosure letter.

The High Court also found that the fraudulent misrepresentations had largely been made by DMH’s director on behalf of DMH. The director was therefore personally liable for the fraudulent misrepresentations.

Comment

The case is a reminder of the importance of a seller making detailed and accurate disclosures in its disclosure letter.

It also shows that if a claimant purchaser can discharge the burden of proving that a defendant had no honest belief in representations it made, any director who made such representations can be found personally liable.

Invertec Ltd v De Mol Holding BV & Anor [2009] EWHC 2471 (Ch)

The Association of British Insurers (ABI) is the trade association for the UK’s insurance industry.  The ABI has around 400 companies in its membership.  ABI member companies account for almost 15 per cent of investments in the UK stock market.  The ABI therefore acts as a voice for many of the UK stock market’s largest investors.

The ABI’s role in corporate governance

The ABI provides information and guidance on corporate governance issues to investors and listed companies in which those investors invest.  As part of its drive to promote best practice in corporate governance, the ABI’s publications include guidelines on executive remuneration.  The recent position paper does not replace the current guidelines but aims to highlight those elements of the guidelines that are of particular relevance at the moment given today’s economic climate.

The new position paper

Comments made by the ABI in the position paper include:

• Concerns over the retention of directors are not sufficient grounds on their own to justify increases to directors’ remuneration, nor is a company’s increased market capitalisation
• If a remuneration committee contemplates using a “material use of discretion”, the company’s shareholders should be consulted on this decision
• Companies should not incur additional costs in the implementation of tax efficient remuneration structures. This is of particular note given the increase in income tax for the UK’s highest earners with effect from 6 April 2010
• If a company experiences an exceptional negative event, bonus payments to its directors should be discouraged. Any bonus payments which are made in such circumstances need to be carefully justified
• Any awards which depend upon performance should be justified by the company’s underlying performance and not only by its performance relative to a comparator group

 Comment

The position paper will be of interest not only to listed companies but to all companies who wish to take steps to address concerns which may have been raised by their shareholders about the remuneration paid to directors.

A derivative action is an action brought by a shareholder on behalf of the company. Owing to the complexity of the previous law, very few derivative actions succeeded. When the Companies Act 2006 (“the 2006 Act”) came into force, it introduced a wider range of circumstances in which such actions could be brought. A derivative action is now expressly available for a breach of duty by a director, even if the director has not benefited personally from the breach. Furthermore, it is no longer necessary for the shareholder to show that the director(s) who carried out the wrongdoing control the majority of the company’s shares. 

Initially, some legal commentators were concerned that activist shareholders would bring such actions simply to disrupt the affairs of the company or make life difficult for its directors. This was despite the 2006 Act containing some procedural hurdles which must be overcome before a shareholder can bring a claim for a derivative action. Recently there have been some cases which consider such hurdles.

Recent cases

In Franbar Holdings Ltd v Patel and ors [2008] EWHC 1534 (Ch) the judge refused an application for permission to continue a derivative action partly on the basis of one hurdle, which requires the court to be satisfied that a director acting in accordance with his duty to promote the success of the company would seek to continue the claim. The judge identified several factors which the hypothetical director would take into account which included: the prospects of success of the claim; any damage to the company’s reputation and business in the event of the action failing; and the cost of the proceedings. The judge considered that in the circumstances it was not possible to conclude that such a director would continue the claim. The failure to overcome just one hurdle was sufficient for the judge to refuse permission. Another key reason for the refusal was the ability for the shareholder to seek a different remedy under the 2006 Act on the basis of what is known as “unfair prejudice”.

In Stimpson & Ors v Southern Landlords Association [2009] EWHC 2072 (Ch) permission to continue a derivative action was again refused. The judge gave a long list of reasons to support his view that a hypothetical director would not seek to continue the action. The judge also stated that if even he was wrong on that specific point, his refusal could be justified on other grounds.

In Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch) the judge emphasised the importance for the derivative action to be based on an act or omission involving negligence, default or breach of duty by a director. As the directors had followed the advice of eminent professionals, the judge considered that they had not been negligent or breached their duties.

Summary

It appears that the courts will interpret the 2006 Act strictly when determining whether the new derivative action can be used. Therefore, for the moment at least, any concerns that activist shareholders will be allowed to use the action frivolously seem to be unfounded.

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)