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.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP, comments: “This shows an interesting strategy in its fight to stamp out bribery. Despite the bribes having taken place in another country, this still fell within the SFO’s remit. Innocent people should still do their due diligence on the foreign businesses in which they invest, and they should try to make sure that the business is conducted properly. Otherwise, they can face clawback for dividends paid out to them despite not being at fault or having any knowledge of the issue.”

One opportunity has been seized by big Pharma company, Bristol-Myers Squibb, through its recent acquisition of Inhibitex, a biopharmaceutical company, at a cost of US$2.5 billion. Inhibitex is currently developing a promising new hepatitis C drug, which though currently only in Phase II development has shown great potential. With over 150 million people worldwide suffering from hepatitis C and over 75% of liver disease being attributed to the illness, producing an effective drug to combat or manage the disease is foremost in the mind of the Pharma industry today; and Bristol-Myers Squibb is not alone. Only last November, Gilead Sciences, Inc agreed to pay US$11 billion for Pharmasset, Inc, another company refocusing on the development of further hepatitis C treatments and with Merck, Vertex and Johnson & Johnson also rumoured to be targeting the hepatitis C market, we can see that big Pharma are on the hunt.

Laura Mole, a member of MAB’s Pharmaceutical and Life Sciences Sector team says, “This latest acquisition by Bristol-Myers Squibb is living proof that the industry is changing and big Pharma are almost panic buying in order to build and diversify their portfolios. This is shown by the acquisition of not only market ready products but also drugs still in the development stages. It is clear that with the Patent Cliff threatening, and with Bristol-Myers Squibb itself to fall victim with its soon-to-expire patent protection on blockbuster drug Plavix, any opportunity to grow and protect will be taken. Small/mid sized Pharma had better be ready for the bidding war to come.”

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.

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.

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

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

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

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

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

Munir Yakub Patel is due to appear before Southwark Crown Court on 14 October 2011 for allegedly “requesting and receiving a bribe intending to improperly perform his functions” (a breach of section 2 of the Act.) It is alleged that Mr Patel told an individual, who had been summonsed to court for a motoring offence, that he could influence the course of the proceedings in exchange for £500.

The Bribery Act, which came into force on 1 July 2011, increases the maximum penalty for bribery from seven to 10 years imprisonment. Further details of the Act are here.

The Act has also introduced a corporate offence of failure to prevent bribery by persons working on behalf of a business. To avoid breaching the Act, employers must demonstrate that they have adequate procedures in place to prevent bribery. For more details of what employers should be doing to avoid breaching the Act, please click here to read an article by our head of employment, Michael Delaney.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of Upload-IT, comments: “The Bribery Act is the biggest legal development of the year and given its very wide reach and political force behind it, it is no surprise to see a prosecution so soon after it came into force.  What this prosecution shows is that the law is there not just to catch big businesses on complex international deals, but also small payments made on a local level too.  Prosecutors will take action regardless of size.  Every business should be aware of the Act and should take appropriate steps to stop its employees, agents and other representatives from breaking the law, particularly as their actions can in turn leave their business criminally liable too.”

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

This trial, which is expected to begin on 12 June 2012, is only the second corporate manslaughter case to be brought under the Corporate Manslaughter and Corporate Homicide Act 2007 since the Act came into force on 6 April 2008. The previous conviction under the Act was in February 2011 (click here and here for further details). Under the Act, convicted companies face unlimited fines, remedial orders and publicity orders; the common law offence of gross negligence manslaughter carries a maximum sentence of life imprisonment. The directors will return to court on 8 December 2011 to enter their pleas.

The case is of particular importance, as it is also the first case to be brought against a medium-sized company, with over 100 employees. Cotswold Geotechnical Holdings, the first company to be convicted, had less than five employees and was ultimately fined £385,000. If convicted, Lion Steel Equipment can probably expect a much larger fine.

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

- to promote the success of the company;

- to avoid conflicts of interest; and

- not to accept benefits from third parties.

Case details

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

Decision

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

Comment

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

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

I have reproduced the article in full below, with permission from The Financial Times.

Resigned to losing director

Q. I run an advertising business and, 18 months ago, we appointed a non-executive director to advise on our growth. We appointed her on good faith as we have known her for a long time and regard her as a friend. However, it has come to my attention that she is also advising a rival company and we are very concerned about this. Can you advise on the best course of action?

A. The duties of the non-executive director in this case are now codified within the Companies Act 2006. Under section 172 of the Act, there is an obligation on the part of the director to promote the success of the company. That section also states that a director must act in a way that he or she considers to be in good faith.

The director is obliged to consider the likely consequences of any decision made by her in the long term, in so far as it may affect the business.

By section 174, there is an obligation on the director to exercise reasonable care, skill and diligence and, by section 175, to avoid a conflict of interest. So, by advising a competitor in the sector, the director clearly has a conflict of interest – and thereby risks being in breach sections 172, 174 and 175 of the Act.

Consequently, your board should consider asking the non-executive director to resign from her position to avoid being in breach of her statutory duties as described above.

If she refuses, the board will have to consider terminating the arrangement.

Michael Delaney is a partner and head of employment at Matthew Arnold & Baldwin, a law firm.

If you would like further advice on this issue, or anything else employment-related, please contact me at michael.delaney@mablaw.com.

Corporate manslaughter has been a criminal offence under the Corporate Manslaughter and Corporate Homicide Act 2007 since the Act came into force on 6 April 2008.

As in the Cotswold Geotechnical case, Lion Steel Ltd has been charged with corporate manslaughter under the Corporate Manslaughter and Corporate Homicide Act 2007. Three of the company’s directors have also been charged with gross negligence manslaughter and charged under the Health and Safety at Work Act 1974 for failing to ensure the safety at work of their employees. In this particular case, an employee of the firm died after he fell through a factory roof.

The hearing will take place at Tameside Magistrates’ Court on the 2 August 2011.

The bringing of a second prosecution further demonstrates how important it is for businesses to ensure that they regularly review their health and safety and risk management systems/policies.

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

Facts of the case

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

Decision

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

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

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

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

Comment

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

Baldwins (Ashby) Ltd v Maidstone

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

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

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

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

A bribe is defined in section 1 of the Act as “a financial or other advantage” offered, promised or given to “induce a person to perform improperly a relevant function of activity, or to reward a person [for doing so.]”

This definition covers many “advantages”, including gifts, hospitality and entertainment, political or charitable donations, sponsorship and publicity.

Employers should note the following:

1. A “financial or other advantage” is still a bribe even if it is given or paid after the event; and

2. Employers or other individuals can be liable even if they unwittingly give or receive a bribe.

Section 7 of the Act introduces a criminal offence for the failure of a commercial organisation to prevent bribery by an “associated person” for its benefit. The statutory definition of “associated person” is very wide, and it covers those people who perform services for, or on behalf of, the employer (e.g. employees, agents and subsidiaries.) However, other people working for the employer, such as consultants, agency workers and volunteers, will also be “associated persons” for the purposes of the Act. Consequently, an employer is potentially responsible for the actions of a wide range of individuals, some of whom it may have only minimal control over.

Breaching the Act: The penalties

* Individuals who breach the Act could be imprisoned for up to ten years; and

* Commercial organisations can face an unlimited fine and be prevented from tending for public contracts.

Preparing for the Bribery Act: The key principles for employers

In March 2011, the Government published Guidance on the Bribery Act which set out six key principles to give commercial organisations assistance in planning, implementing, monitoring and reviewing their anti-corruption and bribery policies and procedures before the Act comes into force.

1. The employer’s anti-corruption and bribery policies (and related policies) should be clear and accessible to all those people who work for them and who  fall within the definition of “associated person”;

2. The management team should establish a zero-tolerance culture regarding bribery and corruption, and ensure that all workers, and those that the company does business with, are fully aware of the company’s anti-corruption and bribery policies;

3. Employers should be fully aware of the bribery risks they face in their sector(s) and in the countries or regions in which they do business. They should carry out regular and comprehensive risk assessments;

4. Employers must take steps to ensure that they know who they are doing business with;

5. Employers should embed anti-bribery principles into their internal controls, recruitment and remuneration policies, operations, communications and training; and

6. Employers must decide who will be responsible for monitoring and reviewing their policies and procedures. They should ensure that they have effective financial and auditing controls that pick up potential and actual irregularities.

Staying on the right side of the law: The key considerations for employers for 1 July and beyond

Employers should consider the following issues to ensure that they do not contravene the Bribery Act, and should seek legal advice where necessary.

1. Recruitment: carry out additional background checks and vetting during the recruitment process (e.g. bankruptcy checks, criminal record checks and additional references);

2. Inductions: include training on the company’s anti-corruption and bribery policies and procedures for all employees and workers (e.g. agency staff, voluntary workers and independent consultants);

3. Expenses: carry our regular audits and ensure there is evidence as to how and why money was spent for each expenses claim submitted;

4. Hospitality: create a hospitality policy, including clear guidance on both the giving and receiving of gifts;

5. Disciplinary procedures: amend disciplinary policies and procedures to make it clear that any breach of the company’s anti-corruption and bribery policies (and related policies) may amount to gross misconduct. Employers may wish to (1) consider making it a specific contractual requirement that employees and other workers comply with these policies and procedures, and (2) consider whether it should be a contractual requirement for some workers to report any suspicions or knowledge they have of a breach of these policies;

6. Bonus and commission schemes: review these schemes to ensure that, as far as possible, they do not unintentionally encourage employees to ignore bribery and corruption risks. Employers should also review incentive arrangements to ensure they do not unintentionally incentivise workers to act improperly or illegally;

7. Whistleblowing: set up a comprehensive and up-to-date whistleblowing policy. All workers should be made aware of its existence, understand how it applies and be given access to a copy of it;

8. Investigating potential breaches: ensure that every incident of a suspected breach is investigated and documented. All investigations should be fair and confidential; and

9. Discrimination: ensure that any anti-corruption and bribery policies and procedures are not based on racial stereotyping of certain nationalities.

This article is intended to simply highlight the main issues and potential problems that employers may face when trying to comply with the Bribery Act. There are many issues (and pitfalls) to consider, so employers should seek legal advice where necessary to ensure that they are not contravening the Act, or inadvertently breaking other laws when implementing compliance measures.

If you would like any legal advice regarding the Bribery Act and its implications on your business, please contact me at michael.delaney@mablaw.com.

Section 44 of the Companies Act 2006, which came into force on 6 April 2008, sets out the rules by which a company may execute a deed.

A company may validly execute a deed in one of the following ways:

1. by affixing its company seal (observing any formalities for use of its common seal as set out in its articles of association);
2. by the signature of two directors of the company;
3. by the signature of a director of the company and the company secretary (if, in the case of a private company, a company secretary is appointed);
4. by the signature of a director of the company in the presence of witness who attests the signature; or
5. by appointing a person, either generally or in respect of specified matters, as its attorney to execute deeds or other documents on its behalf.

A company need not have a common seal and even if the company does have a common seal it can use any of the other methods set out above which will have the same effect as if the deed was executed under the common seal. A company may also validly execute any other document using the methods set out above but when executing any type of document a company should always have regard to any specific signing provisions contained in its articles of association.

In the recent case, of Roger Williams & Others v Redcard Ltd & Others [2011] EWCA Civ 466, the Court of Appeal found themselves considering the execution formalities set out in the Companies Act. Within the agreement in question “Seller” was defined as including Redcard Ltd, who was selling its freehold interest in a building under the agreement, and two individuals, who were selling their leasehold interests in that building under the agreement, (let us call them the “Leasehold Sellers”). The Leasehold Sellers were also authorised signatories of Redcard Ltd. There were various signatures under the words “SIGNED…SELLER” including the signatures of the two Leasehold Sellers.

The question that the Court of Appeal had to consider was whether the agreement, which did not bear separate signatures stated to be “for and on behalf of” Redcard Ltd, was validly executed by the company. The Court of Appeal found that it was. It was not critical that the words “by or on behalf of” the company did not accompany the signatures of the Leasehold Sellers. In the circumstances, it was sufficient that Redcard Ltd was included in the definition of “Seller” and that the Leasehold Sellers’ signatures appeared at the end of the agreement under the words “SIGNED…SELLERS”. However, perhaps the real lesson to be learnt from this ruling can be found in Lord Justice Mummery’s conclusion where he added that it may just be worth stating the obvious:

“expensive and long drawn-out litigation about the execution of a document by a company can be avoided by taking more care over compliance with the formalities at the time of execution by, for example, adding words that expressly state the capacity in which an individual is signing a document to which a company is a party.”

If you require any advice on how to execute a document on behalf of a company or the wording to be used when doing so please contact a member of our corporate team.

The main proposals are:- 

- target companies to be given greater protection against protracted virtual bids ie where a potential bidder is known to be contemplating a bid but has not actually made that bid. Any potential offeror will have 28 days to “put up or shut up”;

- a general prohibition on “offer-related arrangements” between the target and the bidder, including break fees, work fee arrangements etc. However, there will be dispensations including allowing inducement fee arrangements for one “white knight” or where the offeree board is actively seeking an offer due to its distressed financial state.;

- the same financial information will be required for bidders regardless of whether the offer is in cash or shares;

- any public statement of intention by a bidder or target relating to any course of action must be adhered to during the time period stated or (in the absence of any stated period) for no less than one year from the date the offer becomes wholly unconditional. Disciplinary action might follow otherwise. 

The Committee has a tough job – their aim is to ensure that targets are afforded greater protection from predatory bidders but they cannot allow the pendulum cannot swing too far the other way.

In his Budget, the Chancellor announced that, subject to informal consultation, ”the Government will legislate in Finance Bill 2012 to support good business practices and remove barriers to entry, and investment in, the REITs regime, including removing the REITs 2 per cent conversion charge.”

The informal consultation was launched on 5 April and puts forward a number of issues and questions for discussion, including:

1. Introducing a diverse ownership rule for institutional investors. How should “diversity of ownership” and “institutional investor” be defined?

2. Introducing a fixed grace period for new REITs to meet the non-close company requirement. How long should the grace period last, and what should be the minimum number of shareholders at the beginning of (and during) the grace period?

3. Relaxing the listing requirement for REITs. What are the comparative commercial advantages and disadvantages of alternatives to a full listing, including a listing on AIM or other multilateral trading facilities?

4. Abolishing the conversion charge: To what extent will this incentivise new investment (rather than acquisition of existing property investment companies)?

5. Allowing cash to be a ‘good’ asset for the purpose or the REIT balance of business asset test. Should there be an absolute limit on how much cash can be held under the balance of business test, and what should the time limit be for holding cash?

6. Creating a time limit for complying with distribution requirement. What is the current administrative burden of making a dividend payment outside the regular payment cycle? and

7. Redefining “financing costs” for the REIT interest cover test. Which items should be included as a ”financing cost”?

The Chancellor’s Budget announcement on REITs was warmly welcomed by the property sector, which had encouraged the Government to open up the REITs market to new ventures. This subsequent consultation shows that the Government is now willing to relax the qualification criteria and the cost of entry in order to attract new entrants and investment.

Responses to the consultation are required by 10 June 2011. Draft legislation will then be published in autumn 2011 for inclusion in the Finance Bill 2012.

If a company wishes to submit a second form to correct a form that has already been filed it must send a second paper form to Companies House together with a form RP04. A copy of the form RP04 can be obtained from the Companies House website:(http://www.companieshouse.co.uk/forms/generalForms/RP04_second_filing_of_a_document_previously_delivered.pdf). Companies House has, however, confirmed that it will continue with its existing practice of accepting second forms marked “AMENDED” where the original form was filed under the Companies Act 1985 or before 1 October 2009.

Whilst there is now a specific procedure in place for filing corrected forms, Companies House still has no power to administratively remove the original inaccurate form. The Registrar only has limited power to rectify the register and in particular cannot remove material that has had legal consequences in relation to the company, for example the registration of a charge.

So, only a successful application for rectification of the register will remove the blemish on the company’s filing history and even the scope for making that application is limited. The addition of a “RP04” on the filing history of a company will no doubt prove an embarrassing red flag for the hasty company secretary who submitted the original form…

The Government is calling on interested parties to submit a response on the website, suggesting which regulations should be scrapped, merged with other regulations, simplified, or improved.

In the recent Budget Report and Plan for Growth document, the Chancellor outlined proposals to reduce the number of UK regulations in an effort to boost economic growth. (Click here for further details.) This ‘Red Tape Challenge’ is the first step.

There are 21,000 regulations in the UK, and these will be grouped into themes on the website. Every 1-3 weeks, the Government will publish the regulations that relate to a specific sector (‘themes’), with interested parties given a set amount of time to comment on them. The Government will then collate the comments and, after the theme has been closed for public comment, the relevant government departments will have three months in which to justify the continued existence of the regulations called into question. The Government will then decide which regulations should stay, which should go and which should change. All regulations that are to be repealed will be listed on the website.

NB: regulations regarding tax and national security are exempt from this project.

At the time of writing, the timetable for comment is:

7 April – Retail;

6 May – Hospitality, food and drink;

20 May – Road transportation;

2 June – Fisheries, marine enterprises and internal waterways;

16 June – Manufacturing;

23 June – Healthy living and social care;

7 July – Media and creative services;

21 July – Utilities and energy;

4 August – Rail and merchant shipping; and

18 August – Mining and quarrying.

Each of these themes will be split into topics. For example, the current theme, retail, is split into Sunday trading, hallmarking, weights and measures, and so on.

The project is also divided into six “cross-cutting themes”. Government departments must comment on these themes every four months. These are:

1. Employment law;

2. Pensions;

3. Company law;

4. Equalities;

5. Health and safety; and

6. Environment legislation.

The project is expected to run from April 2011 until April 2013.

To read the Government press release which launched the Red Tape Challenge, please click here.

The amendments include:

- no longer having to state whether the company was a traded company at any time during the return period;

- when describing a company’s principal business activity, the classification scheme that companies may use is the 2007 edition of the UK Standard Industrial Classification of Economic Activities (rather than the 2003 edition); and

- requiring the annual return to state whether any of the company’s shares were, at any time during the return period, admitted to trading on a “relevant market” which, for example, would include the London Stock Exchange’s main market, AIM and regulated markets outside the UK.

The regulations setting out these amendments are currently in draft form but it is intended that they will come into force on 1 October 2011 and apply to returns made up to that date or a later date.

What’s happening?

The Government will include a range of measures in the Growth Review, a joint HM Treasury and BIS-led process that aims to ensure that all government departments are doing everything they can to help businesses and the country grow economically. These measures include:

1. A public audit of almost 22,000 business regulations that are currently on the statute book. This will allow businesses to voice their opinions on these regulations (which will be listed on a dedicated website); and

2. A moratorium to exempt businesses and start-up companies with fewer than ten employees from new domestic regulation for three years.

Mr Prisk stressed that there would be a period of consultation regarding how the aforementioned moratorium would work, but he promised that the exemption “will kick in very shortly.”

As part of the Growth Review, the Government also plans to:

1. Continue to exempt companies with fewer than 250 staff from the right to request time to train. Click here for further details;

2. Revoke regulations giving parents of children up to the age 17 the right to flexible working hours. These had been due to come into force on 6 April 2011. Click here for more details;

3. Introduce more transparency into the Government’s ‘One-in, One-out’ regulation rule; and

4. Free small companies from unnecessary audit fees by matching the minimum requirements laid out in EU directives.

The FSB has welcomed the moratorium on the introduction of new employment regulations for micro-businesses, but has called on the Government to extend this to small and medium sized businesses (SMEs).

Also, in its new report, Think Small First, the Confederation of British Industry (CBI) has called on the Government to speed up the employment tribunals system; extend the unfair dismissal qualifying period to two years; provide clear guidance in the absence of a default retirement age; reform the ACAS code; introduce the right to an annual review of flexible working; and introduce a right to agree a return date with an employee going on maternity leave.

What happens next?

Reducing the legislative burden for micro-businesses and SMEs remains an important issue. Over the next few weeks, the Government will (1) consult with businesses on the moratorium, and (2) publish details of how it will introduce sunset clauses into new regulations. This will mean that regulations will have to be reviewed every five years to see if they are effective and still needed.

The Prime Minister has recently made some bold claims, insisting that his Government will create “the most pro-enterprise, business-friendly environment that Britain has ever had” and that the imminent Budget will be “the most pro-growth Budget this country has seen for a generation.”

We shall see what is announced in Wednesday’s Budget…

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

Recommendations

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

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

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

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

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

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

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

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

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

Facts of the case

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

The letter stated:

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

Decision

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

Comment

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

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.

This is the first time that a company has been charged with, or convicted of, corporate manslaughter under the Corporate Manslaughter and Corporate Homicide Act 2007. For further details of the case, please click here.

Matthew Arnold & Baldwin partner Tim Constable has written about the background to this case in detail and looked at the impact the Act will have on companies. Please click here to read this analysis.

This successful prosecution demonstrates how important it is for businesses to ensure that they regularly review their health and safety and risk management systems/policies.

Sentencing is due to take place tomorrow (17 February 2011).

UPDATE (18 Feb 2011): Cotswold Geotechnical has been fined £385,000, but, due to the company’s poor financial state, the Court has said that the money can be paid over 10 years, at a rate of £38,500 per annum.

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

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

Disclosure obligations

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

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

Facts

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

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

FSA decision

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

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

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

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

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

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

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

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

HMRC will target 50,000 SME’s a year looking at business records going back over the last 6 years.  There is a legal obligation to keep adequate records, and failure to do so can give rise to fines of up to £3,000.  This is a change of practice from HMRC who historically have rarely imposed these penalties.

Overtly raising taxes at the moment is political death.  So HM Treasury have to look elsewhere for money.  This seems to be a case of rummaging down the back of the sofa for those extra bits of revenue.  However, for most SMEs – £3,000 is not small change.  Businesses need to ensure that they keep all relevant documentation in addition to their accounts, such as till rolls, cheque stubs, paying-in-slips, cash receipts, etc.

If you want to speak to a solicitor or accountant about your obligations please contact us.

We also offer a business healthcheck  service, which includes a review of your business documentation and compliance.  If you are interested in this please contact our corporate team.

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

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

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

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

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

The prosecution against Cotswold Geotechnical Holdings is the first to be brought against a company under the Corporate Manslaughter and Corporate Homicide Act 2007, which came into effect in April 2008. The case against the company followed the death of an employee, who was killed in September 2008 while taking soil samples from a building site.

The case was adjourned in October 2010 due to the ill-health of the company’s managing director, Peter Eaton. Mr Eaton also faced prosecution for gross negligence, but, at the original hearing, Bristol Crown Court permanently stayed the charges due to his ill-health.

The trial is expected to last three weeks.

The case demonstrates the importance for companies to ensure that they keep their health and safety and risk management systems/policies under review.

Matthew Arnold & Baldwin partner Tim Constable has written about this case and looked at the impact the Act will have on companies. Please click here.

If you have any concerns about how the Act may impact on you and your business, please contact Tim Constable at tim.constable@mablaw.com.

UPDATE: On 15 February 2011, Cotswold Geotechnical (Holdings) Ltd was found guilty of corporate manslaughter. Click here for further details.

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.

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

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

BAE Systems plc (BAE) and the Serious Fraud Office (SFO) reached a settlement agreement in February 2010 as regards BAE’s alleged corruption in the procurement by BAE of a contract with the government of Tanzania. The settlement with the SFO was the result of co-ordinated action with the US Department of Justice.

Since the settlement with the SFO, some court cases have questioned the ability of the SFO to conclude settlements. Judges in two such cases stated that the courts could not be bound by such settlements and the SFO may only suggest a sentencing range, rather than specific sentences. The outcome of the BAE court case has therefore been eagerly anticipated.

Decision

BAE was sentenced on 21 December 2010 after pleading guilty to failing to keep adequate accounting records contrary to the Companies Act 1985.  The guilty plea formed part of the settlement which BAE had reached with the SFO. The judge stated that although he was not bound by the settlement, he accepted the basis of the plea itself.

Comment

The case will be of interest to companies considering self-reporting to the SFO for corruption. It also has a particular relevance given that the Bribery Act 2010 is due to come into force in April of this year.

How can we help you?

We can provide your business with a one hour bespoke training session to explain the implications of the Bribery Act 2010. The wording of the new Act is very wide so it may well affect the way in which your business operates. We can also suggest practical steps to reduce the risk of prosecution.

If you would like more information on the Bribery Act 2010 then please contact Emma Cameron at emma.cameron@mablaw.com

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.

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

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

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

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

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

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

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

The full text of the ruling can be found here.

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

The case

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

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

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

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

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

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

Decision

It was decided that:

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

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

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

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

Comment

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

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

Well, essentially, the BIS report says the following:

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

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

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

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

The High Court said that a deed had an additional execution formality beyond a simple signature in order to become effective. It needed to be ‘delivered’. There were three ways in which a deed could be delivered: (a) unconditional delivery, whereby the deed is irrevocable and takes place immediately; (b) delivery in escrow, where the deed is irrevocable, but only comes into effect upon the happening of an event; or (c) revocable until it is dealt with in a certain way. Deeds executed by companies are presumed to be delivered as a deed on execution unless a contrary intention can be proved. If a party wanted to have the right to revoke, it should ensure that an express right was included in the deed. There was no evidence of an intention for it to be revocable in this case. It had been sent to SQM in escrow, on condition that SQM was to sign and return it; once these conditions had been discharged without unreasonable delay, the deed took effect and could not be recalled.

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

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

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

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

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

Commenting, Ashok Narasimhan, Zenara’s founder said:

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

Matthew Arnold & Baldwin LLP’s John Zucker added:

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

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