Corporate Matters – February 2015
Print newsletter04/02/2015

Director’s obligation to deliver up confidential documents upon termination of appointment
Background The issue in Eurasian Natural Resources Corporation plc v Judge [1] concerned a claim […]
Background
The issue in Eurasian Natural Resources Corporation plc v Judge [1] concerned a claim by an employer for delivery up of confidential information by a director upon termination of his appointment.
The director in question was a non-executive director. A dispute arose after the employer became convinced that the director was leaking confidential information to the press. The director’s service agreement provided that all information acquired by him during the term of his appointment was confidential and should not be disclosed without prior clearance. The service agreement did not, however, contain any express term requiring the director to deliver up confidential documents on the termination of his appointment.
The employer terminated the director’s appointment.
The employer sought delivery up of confidential information documents relating to the directorship. The director refused to do so, arguing that there was no implied term in his service agreement requiring delivery up of the documents and that, in any event, the employer was adequately protected by his ongoing obligations of confidentiality. He sought summary judgment to strike out the application.
Judgment
The High Court agreed with the director that there were no grounds for finding that the director was subject to an implied term requiring delivery up of the confidential information. The Court said that if it had been the “obvious but unexpressed” intention of the parties, it would have been addressed in the service agreement. Further, there was no evidence that such a provision was the norm for directorships and, in practice, such a provision would be difficult to operate, particularly in cases of multiple directorships.
WM comment
The case highlights the importance for companies of clearly documenting the post-termination obligations of their directors, rather than seeking to rely late in the day on implied duties or obligations.
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[1] [2014] EWHC 3556 (QB)

Fine for breach of the disclosure and transparency rules and the listing rules
The Financial Conduct Authority (the FCA) has fined Reckitt Benckiser Group plc (the Company) £539,800 […]
The Financial Conduct Authority (the FCA) has fined Reckitt Benckiser Group plc (the Company) £539,800 for a number of breaches of the Listing Rules and the Disclosure Rules and Transparency Rules:
- LR 9.2.8R (failure to require persons discharging managerial responsibilities (PDMRs) to take all reasonable steps to secure their compliance with the Model Code)
- DTR 3.1.4R (failure to notify the market of share dealings by two PDMRs as soon as possible and, in any event by no later than the end of the business day following receipt of the information)
- DTR 3.1.5R (failure to include all requisite information in the notification to the market relating to the share dealings by the two PDMRs).
The FCA also found two breaches of the Listing Principles:
- Listing Principle 1 (failure to take reasonable steps to enable its directors to understand their responsibilities and obligations to comply with the Model Code, resulting in a breach of the Model Code)
- Listing Principle 2 (failure to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations).
The nature of the failings in the Company’s systems and controls pertaining to share dealings by PDMRs was:
- it was possible, in certain circumstances, for PDMRs to deal in the Company’s shares without having sought clearances in accordance with the Model Code
consequently some dealing occurred without clearance being obtained
the Company did not take steps to reinforce, on any formal or regular basis, the importance and necessity of complying with the Model Code and the Disclosure and Transparency Rules (beyond issuing reminders to PDMRs in advance of close periods and the annual certification process) - the Company did not take steps to ensure that all of its PDMRs were aware of the application of the Model Code to different types of share dealing and of their ongoing compliance obligations
- one of the PDMRs concerned was unaware that pledging shares as security for a loan constituted dealing under the Model Code (and therefore did not appreciate that the obligations regarding clearance and notification applied)
- the Company had placed too much reliance on the knowledge and experience of the PDMRs generally
- the Company’s processes did not enable it to identify or monitor trading conducted other than through its share plan administrator and the Company was overly reliant on its share plan administrator to notify it when dealing had taken place
although the Company’s share dealing policy envisaged an “intention to deal” form being issued as clearance, in practice, clearance was sometimes given orally
inadequate records were maintained of responses to applications for clearance.
The size of the penalty reflected the fact that the breaches took place over a significant period of time and that the FCA had published a number of documents concerning PDMRs and the importance of complying with the Model Code in the relevant period. On the other hand, the Company had cooperated with the FCA investigation, had not profited from the breaches, the breaches had not been deliberate or reckless and the dealings in question had not been based on inside information. The penalty was also reduced by 30 per cent for early settlement.
Walker Morris comment
The case appears to be a classic example of a company having a written policy in place but not sticking to it in practice. It shows the importance of training PDMRs and of effective record-keeping and of keeping systems under review with periodic reinforcement of the importance of complying with the rules.

New rules on company names
The Company, Limited Liability Partnership and Business Names (Sensitive Words and Expressions) Regulations 2014 (the […]
The Company, Limited Liability Partnership and Business Names (Sensitive Words and Expressions) Regulations 2014 (the Regulations) came into force on 31 January 2015. The Regulations reduce the list of “sensitive” words which require approval to their use. Words that previously required approval but which do not under the Regulations include “National”, “International”, “European”, “Group”, “Holding” and “United Kingdom”.
The Company, Limited Liability Partnership and Business (Names and Trading) Regulations 2015 also came into force on 31 January 2015. These regulations also make changes regarding company names, in particular:
- extending the list of characters that can be used in a company name to include accents and diacritical marks amending the words to be considered or disregarded if a name proposed to be registered is the same as a name already registered. Words that have been removed from the “same as” list include “Export”, “Imports”, “Group”, “Holdings”, “International” and “Services”amending the trading disclosures requirement so that where at least six companies operate from or are registered at one office or place it will no longer be necessary to display the details of all companies at the site. It will suffice for the information to be held and made available on request.
WM comment
The relaxation of the company name regime, though not particularly radical, is to be welcomed. For example, at present, if a company wants to have the word “Holding” in its name it must write to Companies House seeking permission and providing evidence that it holds over 50 per cent of the shares in a subsidiary or that it will do so within the next three months. Whilst not an onerous burden to discharge, it can be a nuisance nonetheless.

New rules on corporate directors
The Small Business, Enterprise and Employment Bill (the Bill) is currently working its way through […]
The Small Business, Enterprise and Employment Bill (the Bill) is currently working its way through Parliament and is likely to become law in the Spring.
The law currently provides that each company must have at least one director who is a natural person but it does not prohibit the use of corporate directorships (section 155). One of the Bill’s provisions is to insert a new section (section 156A) into the Companies Act 2006 which will require all directors to be natural persons and to prohibit the appointment of corporate directors. Any appointment purportedly made in contravention of this provision will be void.
On 27 November last year, the Government published a consultation paper seeking views on the extent to which there should be exceptions to the proposed blanket prohibition. The consultation closed on 8 January.
The Government accepts that there is a strong argument for permitting companies with shares admitted to trading on a regulated market to be permitted to appoint corporate directors. Regarding the subsidiaries of a quoted parent, the Government’s position in the consultation is that there are strong arguments for allowing dormant and wholly owned subsidiaries to appoint corporate directors but in other cases the nature of the parent/subsidiary relationship will have to be considered.
A regulated market does not include AIM, and the Government is seeking views on the extent to which any exceptions should be extended to companies whose shares are traded on other prescribed markets. For public companies whose shares are not traded, the Government is asking whether an exception should apply and, if so, whether the exception should apply only to large companies or only to large companies in a corporate group.
For private companies, the Government is suggesting that any exception be dependent upon the size of the company. Any exception should not, however, apply to shell companies which, in the Government’s view, are too easily used as vehicles for criminal activity.
Corporate directors are frequently used in the context of corporate groups with parent companies frequently appointing a nominee to the board of their subsidiaries. The Government’s proposal in these cases is that each case will need to be considered on a case-by-case basis, with account being taken of the nature of the subsidiary, the parent/subsidiary relationship and of the proposed corporate director.
The Government is not proposing to change the existing regime for LLPs.
There will be a transitional period for companies with corporate directors, by which, after one year of the new legislation coming into force, any remaining corporate directors will cease to be directors (subject to the statutory exceptions, as finally agreed).
WM comment
The Government does not appear to be considering an exception for investors who appoint a nominee corporate director to represent their interests in their investee companies.
Many large groups use corporate directors. So too do pensions trustees who often have a corporate directorship. They should “watch this space” closely to find out to what extent they may benefit from an exception to the rule prohibiting corporate directorships.

The advantages of a standard listing for cash shells
The use of “cash shells” with a quotation on the London Stock Exchange (LSE) is […]
The use of “cash shells” with a quotation on the London Stock Exchange (LSE) is a tried and tested way of generating the cash to fund an acquisition trail. Typically a cash shell will join the stock market without any trading history or assets but with the cash resources and managerial expertise to set about buying target businesses. Cash shells are often used as a way of effecting a reverse takeover, where the target is larger than the purchaser (i.e. the cash shell) with the result that the target shareholders become majority shareholders in the purchaser.
Around a decade ago, when cash shells first came to prominence, they were quoted on the LSE’s AIM market (AIM). The regulation of cash shells quoted on AIM was duly tightened up with the introduction, for instance, of a requirement that the cash shell must raise not less than £3 million and more restrictions on its investment policy.
Cash shells will not be able to secure a listing on the Premium Segment of the Official List. To do this they would need to produce, inter alia, at least three years’ worth of audited accounts and a revenue stream in respect of that period. Such stipulations do not, however, apply to companies seeking a listing on the Standard Segment and we have seen a number of cash shells obtaining a listing on the Standard Segment in recent years, since it became possible for UK companies to list on the Main Market by way of a standard listing in 2010, for example, Platform Acquisition Holdings Ltd and Nomad Holdings Ltd.
Standard listing applicants must prepare a prospectus and get it approved by the UKLA, but in other respects the regulatory regime applicable to standard listed companies is more relaxed than it is for AIM companies. In particular, a standard listed cash shell:
- does not need not to appoint a sponsor (an AIM cash shell is required to appoint a Nomad)
- does not need to obtain shareholder approval for a reverse takeover (an AIM cash shell does)
- does not need to obtain the approval of a sponsor to related party transactions
is not subject to restrictions on share dealing by the issuer or management (subject to the statutory requirements) - is not required to offer new shares for cash on a pre-emptive basis to shareholders (subject to the statutory requirements)
- is not required to comply with any corporate governance codes.
These benefits have encouraged a number of cash shells to seek a standard listing as opposed to an admission to AIM since 2010. In many cases, the standard listing will be transient, with the company moving to a premium listing after it has completed its acquisition programme.
WM comment
There are, of course, ways in which a standard listing may be less attractive than admission to AIM. The requirement for approval of the prospectus, and the delay that may entail, is one. But management teams or investors considering establishing a quoted cash shell for acquisition purposes should at the very least consider a standard listing an as alternative to an AIM quotation.

The end for schemes of arrangement in UK takeovers?
In his Autumn Statement, the Chancellor announced the Government’s intention to stop the practice of […]
In his Autumn Statement, the Chancellor announced the Government’s intention to stop the practice of using schemes of arrangement involving a reduction of capital to effect a takeover of a public company. There is no specific date for this as yet but the Government has said it will be effective from “early 2015”. A draft of the amending regulations was published and laid before Parliament on 12 January this year.
The draft regulations insert a new section 641(2A) into the Companies Act 2006, which prohibits a company from reducing its share capital as part of a scheme by which a person either acting alone or together with its associates would acquire all of the shares in a company or all of the shares of a particular class. (The new rules will not apply to a scheme which inserts a new holding company on the condition that all or substantially all of the members of the company undertaking the scheme become members of the new holding company and their proportionate shareholdings remain substantially the same).
In recent years we have seen an increasing number of public company takeovers structured as schemes of arrangement. A key advantage of using schemes has been that it is possible to structure the takeover in a way that avoids stamp duty. Whereas stamp duty is payable on the transfer of shares in UK companies at a rate of 0.5 per cent, the issue of new shares is not subject to stamp duty. (Stamp duty is not payable on the transfer of shares in an AIM company, however.) It has been possible to save stamp duty on a public company takeover by reducing the target company’s share capital and issuing new shares to the bidder under a court-approved scheme.
The stamp duty saving was a major factor in favour of structuring a takeover as a scheme of arrangement. It is probable that we will see fewer schemes used as a consequence. However, there are other reasons why a scheme may still be worthy of consideration:
- schemes become binding on all shareholders once approved by 75 per cent of them; with an offer, the bidder must obtain 90 per cent acceptances before it can begin the process of mopping up the remaining minority
- a scheme can often cater for difficulties associated with US shareholders more effectively than an offer. This is because there is an exemption from the registration requirements under the US Securities Act which covers schemes of arrangement.
Set against these advantages, the traditional offer route can for its part also boast some advantages:
- with a scheme, it is the target and its independent directors who are in control of the timetable whereas with an offer control of the timetable will generally be with the bidder
- if the bidder is prepared to live with the possibility of a continuing minority interest in the target, an offer is the quickest and easiest way of obtaining 50+ per cent control. By contrast, a scheme is an “all or nothing” arrangement. (In practice, if the bidder is being financed by bank borrowings, the finance documents will not normally declare the offer unconditional at anything less than 75 per cent so the advantage in this case will be largely theoretical.)
- an opposed minority of target shareholders may be able to block a scheme despite holding only a small number of shares between them, as a scheme must be approved both by a majority in number of the holders of the shares voting in person or by proxy and by shareholders holding 75 per cent of the nominal value of the shares being voted at the meeting
- the involvement of counsel and the courts will usually mean that a scheme is more expensive.
The new regulations will contain a transitional provision and the section 641(2A) prohibition will not apply to takeovers where a firm intention to make an offer has already been announced or the terms of an offer have already been made.
WM comment
Walker Morris have completed a number of takeovers in the past few months which were structured as schemes of arrangement and which involved a capital reduction and the issue of shares to the bidder – which will soon be prohibited. We expect to see fewer transactions structured as schemes in the months to come. If you have any such transactions in the pipeline that may now need restructuring, please contact us to discuss your options.

Time to get ready for the new UK accounting standards
A new set of accounting standards came into force in the UK on 1 January […]
A new set of accounting standards came into force in the UK on 1 January 2015, replacing all existing accounting standards. The new standards are based on the International Financial Reporting Standards (IFRS) for SMEs.
The new regime is mandatory for accounting periods beginning on or after 1 January 2015.
The new standards are:
- FRS 100 (“Application of Financial Reporting Requirements”), which sets out the overall framework for financial reporting, for example, which standards apply to which entity and when does reduced disclosure apply
- FRS 101 (“Reduced Disclosure Framework”)
- FRS 102 (“The Financial Reporting Standard applicable in the UK and Republic of Ireland”), which introduces a new single standard for SMEs.
- FRS 103 (“Insurance Contracts”), which sets out the accounting and reporting requirements for insurance contracts.
All existing Financial Reporting Standards (FRS), Statements of Standard Accounting Practice (SSAP) and Urgent Issues Task Force (UITF) Abstracts are replaced. The FRS for Smaller Entities remains, but in modified format.
Companies will need to take accountancy advice on the application of the new standards on the preparation of their financial statements, and on the changes introduced by the new standards, but the advent of the new standards may also have an impact on corporate transactions and this should be borne in mind during this transitional year. For example:
- a change in accounting basis may impact on the calculation of an earn-out or bonus arrangement
- similarly, a change in accounting basis may impact remuneration arrangements with senior employees and directors
- where accounts warranties refer in detail to accounting standards, care must be taken to ensure reference is made to the correct standard. The obligation to give a true and fair view required by section 393 of the Companies Act 2006 remains
preparation of completion accounts. A completion accounts schedule will ordinarily refer to applicable accounting standards and care will need to be taken to ensure the correct standard is used - sellers will want to ensure that any losses for breach of warranty are not extended by the change in accounting basis
- buyers looking to extract value from the target through distributions may seek a warranty as to the impact of the new standards on distributable reserves on the last set of accounts
- compliance with debt and other covenants in finance documentation may be affected by the move to the new standards and this should be borne in mind if financial covenants are being negotiated or re-negotiated
- calculations of available distributable reserves by reference to interim or initial accounts may produce a different figure under the new accounting standards than they would have under the old ones.
WM comment
Some companies will already be using the new accounting standards. Those that aren’t should start familiarising themselves with the new standards now. The new standards may impact on corporate finance documentation currently being negotiated or which may be negotiated in the months to come and the impact of the new standards should be taken into consideration when doing so.

Time to report on your payment practices?
The Government has been consulting on draft regulations containing a new reporting requirement on payment […]
The Government has been consulting on draft regulations containing a new reporting requirement on payment practices and policies.
Section 3 of the Small Business, Enterprise and Employment Bill, which is currently going through Parliament, empowers the Secretary of State to impose a requirement on companies to publish information about their payment practices and policies. This reporting obligation will not apply to micro entities nor to companies that qualify for the small companies regime or which qualify as medium-sized companies under sections 465 or 466 of the Companies Act 2006. The new regime will apply to large companies and LLPs and all quoted companies.
The rationale for the regulations is to tackle the problem of late payment by allowing suppliers to identify which customers are good (and poor) payers.
Companies will be required to report on their websites on a quarterly basis within 30 days of the end of the relevant quarter. The draft regulations state that the report should be in a “prominent position” and appear alongside other payment practices reports. The proposal is that that there be no such obligation to report in the annual accounts.
Companies will be asked to report on an individual rather than consolidated basis.
The Government’s proposal is that the reporting requirement should cover only invoices paid in relation to contracts for goods, services or intangible assets (including intellectual property) and which are connected to the carrying on of a business. Consumer contracts and financial services contracts will fall outside the reporting requirements.
It is proposed that companies would report on:
- standard payment terms, including the length of any standard payment period, average payment period and the maximum period for payment
- any variation on standard period for payment, including the notice given of any variation
- the percentage of invoices paid late
- the average time taken to pay an invoice
- percentage of invoices paid within specific thresholds (30 days, 60 days, 120 days, 120+ days)
- dispute resolution mechanism.
Companies will be asked to report on a standardised basis to facilitate comparison.
A breach of the reporting requirements will be a criminal offence and directors may face personal criminal liability.
WM comment
There has been considerable press coverage in recent months of companies such as Heinz and Premier Foods delaying the settlement of invoices and the Government appears to take late payment of invoices very seriously. Accordingly, we can expect the regulations to be implemented in something very like their current form. Large companies and LLPs will need to monitor their payment practices to ensure that they are able to report in compliance with the new regime. They will be under tight time pressure to do so, and with the possibility of fines for non-compliance, it is important to start getting ready for the regulations now.