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.”

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 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

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.

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

I have outlined some of the ways employers can ensure they comply with the new Act – please click here.

This article is only intended as guidance. There are many issues to consider, so employers should seek legal advice where necessary to ensure 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.

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

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.

There is the thorny issue of facilitation payments – payments made to officials to speed up processes, for example to get an export licence through quicker.  Lots of business are asked to pay these, but what should you do, as the Bribery Act makes it clear that you should not pay them?

Corporate hopitality – can you take clients to Lords or out to lunch?  Can you send them a client to say “thank you”?  One interesting question that came up yesterday was whether you can take away the personal partners or families of the people you want to impress?

But a big thank you must go to Lord Triesman and the Sunday Times.  Thank you for providing a very live case study about alleged corruption by certain members of football’s international governing body, FIFA.   Can the Bribery Act catch them if they have done anything wrong?  Would accepting a gift that is for a charity or a “good local cause that helps the community” rather than the member of the committee’s back pocket amount to a bribe?  And what is the story with Qatar’s bid, because according to Transparency International Qatar is deemed to be a less corrupt place than the UK, as can be seen here: http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results?  Should England have played ball to have won the right to host the 2018 World Cup?  Or should England be keen to be the winner of the more humble fair play award?

In your own business, can you afford not to play keepy uppy with what your competitors are doing?  Or can you afford not to play ball with the requirements of the new Bribery Act?  Do you play a gung ho formation and just go for it, or play it with a solid defence?

These are the dilemmas facing businesses.  But there are very serious issues at stake and businesses can’t afford to bury their heads in the sand.  To continue the sporting analogy, you might want to make your own luck, and speak to us to find out more what tactics to pursue.

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 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.

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

Recommendations

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

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

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

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

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

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

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

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

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

Facts of the case

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

The letter stated:

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

Decision

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

Comment

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

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

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

Disclosure obligations

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

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

Facts

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

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

FSA decision

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

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

Corporate insolvencies across the board were down on the same period last year: compulsory liquidations and creditors’ voluntary liquidations decreased by 11.3% (seasonally adjusted), corporate receiverships by 23.9%, administrations by 24.4% and company voluntary arrangements by 22.4%.

Personal insolvencies followed the same trend, save for debt relief orders. Bankruptcies decreased by 29.2% and individual voluntary arrangements by 5.4%. Debt relief orders increased by 15.4%.

Further analysis of these statistics by the Corporate Recovery and Insolvency Team follows shortly.

It remains to be seen whether the Supreme Court accepts Safeway’s application, although if it takes into account the unanimous decision of the Court of Appeal, it is unlikely to do so. If the Supreme Court does choose to review the case, directors and employees of an organisation will again be at risk of being ruled to be liable for breaches of competition law by that organisation.

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.

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 !

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

Under the contract, Ericsson was restricted during the wind-down phase from varying contracts and terms of employment, or recruiting or removing employees in relation to the project. It therefore claimed that the terms were damaging to its interests, and that those terms should apply only in the final 12 months of the contract. Hutchison, meanwhile, argued that the measures were needed to ensure the smooth transition of the project back in-house.

In deciding that the provisions should apply only within the final 12 months of the contract, Mr Justice Akenhead said that any outcome of the trial would not hinder either party to any great extent. On that basis, it sounds like this was a fall-out because of entrenched positions, and it could have been resolved…over a phone call?

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 Bribery Act 2010 (Act) is due to come into force in April 2011. The current English law on bribery was considered to be unsatisfactory because it did not comply with the Organisation for Economic Co-operation and Development’s Bribery Convention, ratified by the UK in 1998. The handling by the English courts of the investigation into bribery allegations against BAE Systems has also been the subject of much criticism. The Act is designed to address these issues.

Commercial organisations will have a defence against the offence of failing to prevent bribery if they can show that they had “adequate procedures” in place to prevent persons “associated” with the organisation from making bribes. The Act does not provide any detail as to what constitutes such “adequate procedures”.

Consultation

The Ministry of Justice has now published a consultation document on guidance for commercial organisations to help them ensure that they have “adequate procedures” in place.

The draft guidance contains 6 principles:

• risk management and mitigation;
• top level commitment to bribery prevention;
• due diligence;
• clear, practical and accessible policies and procedures;
• effective implementation; and
• monitoring and review.

The consultation period is to last 8 weeks, with 8 November 2010 being the deadline for responses. A response will be published early in 2011 together with the final form of the guidance.

Registered name

A company’s registered name must appear on all forms of business correspondence and documentation including:

• business letters, notices and other official publications;
• business emails;
• order forms;
• cheques purporting to be signed by or on behalf of the company;
• orders for money, goods or services purporting to be signed by or on behalf of the company;
• invoices and other demands for payment;
• receipts and letters of credit; and
• its websites.

In addition, a company must display its registered name at: its registered office; any location at which it keeps its records available for inspection; and any location at which it carries on business.

Additional information

Additional information is required to be displayed on all business letters and order forms (whether in hard copy, electronic or any other form) and on all websites of the company including:

• the part of the United Kingdom in which the company is registered;
• the company’s registered number;
• the address of the company’s registered office;
• if a company is exempt from the requirement to use “limited” in its name, the fact that it is a limited company;
• if the company is a community interest company which is not a public company, the fact that it is a limited company;
• if it is an investment company, the fact that it is this type of company;
• if it is a company which has chosen to display its share capital, it must refer to the amount of paid up share capital; and
• if the letter includes the name of a director of the company (other than in the text or as a signatory), the name of every director of that company.

If a company is supplying goods or services through a website then its VAT registration number should also appear on its website. HMRC has its own requirements as to the information to be included on a VAT invoice.

Failure to comply with the information requirements constitutes a criminal offence and the company and its officers who are in default are liable to a fine.

If you have any questions about what information your company needs to disclose, please contact a member of the Corporate Team at Matthew Arnold & Baldwin LLP.

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.

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

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

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

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

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

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

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

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

Case update

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

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

The court decided that:

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

Comment

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

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

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

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

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

Directors’ remuneration

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

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

Directors’ re-election

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

Conclusion

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

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

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

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

Facts of the case

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

Comment

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

Background

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

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

The case

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

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

Comment

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

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

Background

A court has ruled as a preliminary issue that where a partnership deed is silent as to the basis of valuation for the purpose of determining the amounts payable to outgoing partners, such amounts have to reflect a fair value of the partnership’s assets and cannot be based on historical annual accounts which greatly underestimate the value of the partnership’s main asset which, in this case, was land.

Facts

The partnership deed provided that when a partner retired, died, became bankrupt or became a patient under the mental health legislation, his share in the assets of the partnership would accrue to the surviving partners in the same proportions as their respective shares in the partnership property, and the outgoing partner (or his personal representative) would be paid the amounts standing to his credit as his share in the capital of the partnership and as undrawn profits belonging to him in the “last annual general account prior to his retirement, death or bankruptcy or becoming a patient”.  However, no accounts had been agreed for any of the relevant years.

Decision

The court held that the outgoing partners were entitled to a “fair value” which was the market value of the land in question unless there was an agreement to the contrary, or there were other factors rendering such a value unfair. 

Comment

In the circumstances, the court decided in favour of the outgoing partners receiving a “fair value” but the case is nonetheless an important reminder that it is best to include clear valuation provisions in any partnership deed and ensure that proper and up-to-date accounts are kept so as to avoid the extra expense and stress of a court application at the time of determining an outgoing partner’s share.

Drake v Harvey & Ors [2010] EWHC 1446 (Ch) ]]> http://www.mablaw.com/2010/06/valuation-of-partnership-assets/feed/ 0 http://www.mablaw.com/2010/06/takeover-panel-publishes-consultation-paper/ http://www.mablaw.com/2010/06/takeover-panel-publishes-consultation-paper/#comments Fri, 04 Jun 2010 16:23:30 +0000 Emma Cameron http://www.mablaw.com/?p=3751 Following on from recent criticism of the takeover of Cadbury Plc by Kraft Foods, the Code Committee of the Takeover Panel (Committee) has published a consultation paper to discuss shortcomings in the current takeover process.  Whilst not stating actual recommendations for change, the Committee does propose potential amendments to the Takeover Code (Code) and highlights some of the key areas to be considered.  These areas include:

• 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)

1. Tackle ‘red tape’

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

2. Businesses

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

3. Takeovers

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

4. Operating and Financial Reviews

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

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

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

Facts of the case

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

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

Decision

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

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

Comment

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

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

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

1. Corporate governance

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

Labour

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

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

Conservatives

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

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

Liberal Democrats

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

2. Takeovers

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

Labour

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

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

Conservatives

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

Liberal Democrats

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

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

3. Small and medium-sized businesses

Labour 

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

Conservatives

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

Liberal Democrats

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

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

3. Regulatory burden

Labour 

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

Conservatives

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

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

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

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

Liberal Democrats 

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

Comment

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

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

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

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

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

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

This is where a business should typically look to its force majeure clause in its contract. This is the clause that (if properly drafted) usually sets out the contractual rules and procedures for “events outside the control of the parties” or for “Acts of God” or some such.

A properly drafted force majeure clause should set out:
a) what constitues an event of force majeure;
b) how the parties agree to deal with it in terms of costs and liabilities;
c) how time works (e.g. are obligations frozen, cancelled or pushed off?);
d) a procedure for notifying each other; and
e) whether any consequences follow (e.g. termination) if the event continues for too long.

Do you have a properly drafted clause?

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.