With effect from 1st August 2011, companies will be able to raise up to 5 million euros (up from 2,500,000 euros) before the requirement to produce a Prospectus is triggered.

In addition, they will be able to raise finance from 150 person, not including certain qualified investors (up from 100 persons), before the requirement to produce a Prospectus is triggered – regardless of the amount of money being raised.

Preparing a Prospectus is a time-consuming and costly process and these measures have been brought in to provide a much needed fillip to SMEs looking to raise finance. Many of those small companies see credit as the primary source of finance but equity finance can be attractive too.

Time will tell whether these measures actually have any effect. They will make it easier for the SME to seek to raise finance but will not necessarily make an investment opportunity any more attractive to the investor community.

Lord Davies’ report was published on 24th February this year and as well as recommending that listed companies  establish a policy on boardroom diversity, which includes  measurable objectives for implementing the policy and which should be disclosed annually together with a progress report, other recommendations include:-

- that certain listed companies should disclose the proportion of women they have on their board, the number of women in senior executive positions in the company and the number of women employees in the organisation as a whole;

- that FTSE 100 companies  aim for a minimum of 25% of female board representation by 2015;

- that FTSE 350 companies should set their own targets for female board representation by 2013 and 2015, and these targets should be announced within the next six months (by September 2011).

The consultation document can be found here:-

http://www.frc.org.uk/publications/pub2575

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

The full text of the ruling can be found here.

The 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

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

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

The 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.

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

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

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.

• 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.

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

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

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

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

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

Facts of the case

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

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

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

Decision

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

Comment

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

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

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

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

Facts

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

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

Comment 

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

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

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

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

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

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

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

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

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

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.

Background

On 3 occasions in the summer of 2004 Mr Patel placed a series of spread bets on listed companies. The FSA claimed that Mr Patel was only able to place such bets on the basis of restricted information provided to him by Mr Chhabra, as the relevant information was not generally available to the public.

At the time the bets were placed, Mr Chhabra was a research analyst at Evolution Securities Limited, covering Ebookers plc and Eidos plc. Mr Patel was his friend and an experienced spread better. Mr Chhabra became aware of restricted information relating to Ebookers plc and Eidos plc and he passed it on to Mr Patel. Mr Patel placed bets on these companies shortly after receiving such information. Mr Patel profited to the sum of £85,541 from the bets.

FSA decision

In November 2008 the FSA issued a Decision Notice on Mr Chhabra and Mr Patel notifying them that the FSA had decided to impose penalties on them for market abuse. The FSA also prohibited them from performing functions in relation to any regulated activities. Both Mr Patel and Mr Chhabra denied that they had engaged in market abuse and referred the Decision Notice to the FSMT.

FSMT decision

Mr Chhabra admitted to the FSMT that, with hindsight, it could appear suspicious to communicate with a third party while in possession of restricted information but argued that this was not evidence of wrong-doing. However, after having considered the evidence as a whole, the FSMT upheld the FSA’s findings that Mr Patel’s bets had been placed on the basis of the restricted information passed to him by Mr Chhabra. Both Mr Chhabra and Mr Patel had therefore engaged in market abuse. A separate FSMT hearing will consider whether the penalties and prohibition imposed by the FSA are appropriate.

Comment

In its decision the FSMT explicitly stated that it regards allegations of market abuse as serious allegations. This decision shows that market abuse will not be tolerated by the FSA or the FSMT and should serve as a warning to anyone in a similar position to Mr Chhabra or Mr Patel who is tempted to engage in abusive practices.

Robin Chhabra and Sameer Patel and FSA

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.

Directors of companies have always been subject to various duties but until the Companies Act 2006 (“the 2006 Act”) came into force, these duties had not been consolidated and set out in one place.  The duties set out in the 2006 Act are the: 

1. Duty to act within powers (which means that a director must act in accordance with the company’s constitution and  must only exercise his powers for their proper purpose)

2. Duty to promote the success of the company (which means that a director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as whole)

3. Duty to exercise independent judgement

4. Duty to exercise reasonable care, skill and diligence

5. Duty to avoid conflicts of interest

6. Duty not to accept benefits from third parties

7. Duty to declare interests in proposed transactions or arrangements with the company  

Although the 2006 Act sets out or “codifies” directors’ duties, the 2006 Act provides that the new duties are to be interpreted and applied in the same way as the previous case law and therefore such case law still needs to be followed. It should also be noted that the codification is not exhaustive and does not cover all of the duties which a director may owe to a company, such as: the duty to consider or act in the interests of creditors and the duty of confidentiality owed by a director to the company. The new duties are cumulative so where more than one duty applies in a given case, the directors must comply with each applicable duty.

Consequences of breach

The consequences of a breach of the new duties are the same as for breach of the corresponding common law or fiduciary duties.

 Ratification

The 2006 Act has significantly amended the law on ratification so that any decision by a company to ratify conduct by a director which amounts to negligence, default, breach of duty or breach of trust must be taken by the shareholders without reliance on the votes in favour by the director or any person connected to him (e.g. certain family members).

Actions requiring the approval of the company’s shareholders

There are certain types of transaction between a company and its directors which must be approved by the company’s shareholders. These transactions include loans to directors and service contracts which are more than two years in duration. However, perhaps the transactions of most relevance which require shareholder approval (or should only be entered into subject to shareholder approval) are “substantial property” transactions which are defined as arrangements between the company and a director (or a person connected with a director) of the company itself or its holding company relating to non-cash assets which either: (a) exceed 10% of the company’s asset value and are worth more than £5,000; or (b) exceed £100,000.

Summary

Despite directors’ duties being codified in the 2006 Act, the former law is still relevant when interpreting such duties. Directors should therefore seek advice if they are concerned about breaching any duties so as to ensure that they understand the full extent of such duties. Directors must take particular care when entering into transactions with companies of which they are directors and, dependent upon the nature of the transaction and the company’s articles of association, declare their interest to the other directors and/or seek the approval of the shareholders as regards such transactions.