Corporate Matters – January 2014
Print newsletter29/01/2014

Consultation on changes to AIM Rules
The London Stock Exchange published AIM notice 38 on 27 January, which consults on a […]
The London Stock Exchange published AIM notice 38 on 27 January, which consults on a number of proposed changes to the AIM Rules for Companies and AIM Rules for Nomads. What are the principal proposed changes?
Proposed changes to the AIM Rules for Companies
These include:
- clarifying that the London Stock Exchange has jurisdiction over AIM companies that cease to have a class of securities admitted to AIM, for the purpose of investigating and taking disciplinary action against breaches of the AIM Rules allegedly perpetrated during the time when its securities were admitted to AIM
- adding to the list of information required to be available on a website under AIM Rule 26, including details of the corporate governance code that the AIM company has decided to apply, how it complies with that code, or if no code has been adopted, disclosure to that effect
amending AIM Rule 11 concerning the disclosure of price sensitive information, to replace the reference to a “substantial” movement in the price of AIM securities with reference to a “significant” movement. The Exchange has clarified that it does not consider this change in terminology to mean a different standard of disclosure – the change is purely to bring the wording into line with that used in the Financial Services and Markets Act 2000.
Proposed changes to the AIM Rules for Nomads
These include:
- clarification that, on a change of control of a firm that is a nominated adviser, a new nominated adviser application is required
expansion of the definition of “Qualified Executive” in Rule 4.
Walker Morris comment
The consultation is scheduled to close on 3 March. We will keep you updated with further developments.

Dealing with conflicted directors
A recent Court of Appeal decision has lessons for both solicitors and non-executive directors on […]
A recent Court of Appeal decision has lessons for both solicitors and non-executive directors on how to manage conflict situations.
Background
In Newcastle International Airport Ltd v Eversheds LLP [1] the defendant solicitors, Eversheds, had been instructed to draft the terms of new employment contracts for two executive directors of the claimants, Newcastle International Airport Limited (NIAL). These instructions were the product of a meeting between the executive directors and the chair of the Remuneration Committee. Eversheds provided finalised drafts to the chair of the Remuneration Committee for signing following negotiations with the two directors. The contract contained terms which allowed for substantial bonuses and, in one case, a release from certain restrictive covenants that had been part of the directors’ existing contracts. When the full extent of the bonus liability became apparent, NIAL sued Eversheds, arguing that the solicitors were negligent in taking instructions from the same executive directors on the provisions of the service agreements without consultation with the Remuneration Committee.
The High Court disagreed. The court found that the chair of the Remuneration Committee had ‘held out’ that the directors were specifically authorised to communicate with Eversheds direct on NIAL’s behalf. Once this apparent authority as agent was established at the outset, Eversheds were under no obligation to continually check with NIAL that the agent had actual authority to act on particular provisions of the draft contracts.
NIAL appealed.
Judgment
The Court of Appeal allowed the appeal.
The High Court decision had focused on the question of whether the directors had the requisite authority to give instructions to Eversheds in relation to the revised contracts. The Court found that the judge had been correct in finding that the directors had the requisite authority. However, in the words of the Court:
“This case is not about authority. It is about, and only about, what, in the particular circumstances in which they were placed, was Eversheds’ duty towards their client, NIAL; whether they breached it; and whether any breach caused damage to NIAL. The duty question arises because of the conflict of interest between NIAL and the executives in relation to the giving of instructions for the revised contracts, a conflict of which Eversheds were or ought to have been aware.”
The Court found that Eversheds had breached their duty of care. The Court said it was “less than ideal” that Eversheds had taken instructions from the directors in this case, although it stopped short of saying that it was wrong to do so. However, the Court considered that Eversheds’ duty required it, at the end of the drafting process, to give express, separate advice to the chair of the Remuneration Committee as to the nature and effect of the changes that had been made to the service contracts.
Ordinarily, where a director was authorised by his or her company to instruct solicitors in relation to a matter where there was no question of that director’s personal interest conflicting with that of the company, there was no obligation on the solicitors to give their advice to any person other than the director instructing them. This was, however, not such a case. In the special circumstances of the case, Eversheds were obliged to provide the finished drafts to the chair of the Remuneration Committee and to ensure that these “were accompanied by a memorandum explaining in user-friendly language a summary of the scheme and workings of each material change to the executives’ original contracts and identifying where in the drafts the changes could be found”.
The next issue to be decided was whether that breach of duty was causative of loss. That involved answering the question of whether, had Eversheds provided an explanatory memorandum of the changes to the contract, the chair would have read that memorandum. The Court concluded that she would not have done so, accepting the judge’s findings that she took a broad brush approach (in the words of the Court, “a blind spot of massive proportions”) to the discharge of her duties as chair and was not a woman who concerned herself with the minutiae. On that basis, NIAL’s claim failed.
Walker Morris comment
The case has lessons for both solicitors and clients. For solicitors, it is to be aware of the identity of the client and the interests of that client and to be mindful of any conflicts between the company and the agent instructing the solicitors on behalf of that company.
The lesson for clients – specifically non-executives and independent members of committees – is to attend to the detail in the discharge of their obligations. Rigorous – even any – scrutiny of draft contracts may not be something to look forward to but, as this case demonstrates, it can be costly if it is not done.
[1] [2013] EWCA Civ 1514

Directors’ actual and apparent authority to bind company
Parties to a contract need to be confident that the directors of the company they […]
Parties to a contract need to be confident that the directors of the company they are dealing with have authority to bind the company. Authority may be “actual” or “apparent”. What does this mean in practice and what is the position where the director has no authority?
In LNOC Limited v Watford Association Football Club Limited [1] the de facto managing director and ultimate owner of Watford, one Mr Bassini, had entered into finance agreements with LNOC on behalf of the company. When the loans were not repaid LNOC commenced proceedings. Watford’s defence was primarily that Bassini had no authority to bind the company.
The court considered separately the issues of actual authority and apparent authority.
Judgment on actual authority
The court began by noting that the authority to manage the affairs of a company is vested in its board of directors and that the board usually delegates authority for particular matters to individual directors or officers. The delegation of authority may be express or implied. It can be implied by the director’s position; for instance, a managing director will have implied actual authority to do all such things as fall within the usual scope of that office. There does not need to be any formal appointment process for a director to be vested with implied authority [2].
Section 172 of the Companies Act 2006 provides that a director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole. This is a subjective test and it is irrelevant if, with the benefit of hindsight, the transaction in question turned out to be ill advised. However, the court explained that “a director cannot have actual authority to act in a way which he does not consider, in good faith, to be in the company’s interest”.
Accordingly, the court assessed the evidence of Bassini’s state of mind when entering into the finance documents. It concluded that it was not shown that Bassini had not acted in good faith in Watford’s best interests. Accordingly, Bassini had actual authority.
Judgment on apparent authority
In view of the finding on actual authority, it was not strictly necessary for the court to consider the issue of apparent authority, but it very helpfully did so.
The court began with section 43 of the Companies Act 2006. This provides that a contract may be made either by some duly authorised person acting on behalf of the company or by the company itself under its common seal. By section 44(2) of the Act, a document is validly executed by a company if it is signed by two “authorised signatories”. Every director and the company secretary is taken to be an authorised signatory (section 44(3)). Section 44(5) says that in favour of a purchaser a document is deemed to have been duly executed by a company if it purports to be signed in accordance with section 44(2). For these purposes a “purchaser” means a purchaser in good faith for valuable consideration.
The issue that the court needed to resolve was what constituted good faith. In doing so it applied Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (in liquidation) [3] that, in order to establish a lack of good faith, Watford must show a dishonest or irrational belief by LNOC in the relevant section 44(3) signatory. It stated: “… the issue is not constructive notice or matters which might have caused a reasonable man to ask some questions. The issue is whether or not the circumstances were such that any belief by [LNOC] that Mr Bassini had actual authority would have been dishonest or irrational”. On the facts, there were no such circumstances.
Walker Morris comment
The judgment is a welcome one, not only for the common sense decision reached but for the clarity of its approach to what can be complex issues.
[1] [2013] EWHC 3615 (Comm)
[2] Hely-Hutchinson v Brayhead [1968] 1 QB 549
[3] [2010] HKCFA 63

Good news for good and bad leaver clauses
Good and bad leaver provisions – a mainstay of private equity deals – don’t often […]
Good and bad leaver provisions – a mainstay of private equity deals – don’t often find themselves in court. A very recent High Court decision has considered their effectiveness.
In Moxon v Litchfield [1] a former director, Mr Moxon, sought redress in respect of his removal as a director and the provision in the company’s articles of association and shareholders’ agreement which compelled the transfer of his shares at par value where he was characterised as a “Bad Leaver” (as defined in the articles).
The essence of the case was whether or not Mr Moxon had been correctly characterised as a Bad Leaver. The court found that he had been. What is of more general interest is the approach the court then took to the operation of the Bad Leaver provision.
The court said that there was no basis for it to intervene in what was a contractual arrangement between the parties. This was the case even though this might create a “harsh, even draconian, result” (the court’s words) for the leaver. The Bad Leaver provision represented a readily understandable balance between the reasonable expectations of management and the investors. The court added that: “the provisions for removal of a director and the deemed transfer of his shares at a price depending on the circumstances of his removal, do not seem to me to be offensive to the nature of the Company as a small body corporate based on personal relationships”. This was particularly the case where, as here, provision had been made for the distributions of profit each year and was therefore not a situation where the deemed transferor lost all benefit from his participation.
Accordingly, Good and Bad Leaver provisions have received a firm measure of judicial support. The only caveat is that they be strictly interpreted, exercised in good faith and not used for (in the words of the court) “base and unworthy purposes”.
Walker Morris comment
The court’s robust commercial approach to Good and Bad Leaver provisions is to be welcomed. They form an important element of the relationship between management and investors and it is right that this be left to the parties themselves to determine, free, so far as possible, from judicial interpretation.
[1] [2013] EWHC 3957 (Ch)

Government proposals for enhancing corporate transparency
The Government has been consulting on proposals to enhance corporate transparency. Draft legislation is expected […]
The Government has been consulting on proposals to enhance corporate transparency. Draft legislation is expected shortly but there is more than a strong possibility that the current relaxed approach to beneficial ownership and nominee directors may be about to change. Corporate finance professionals, intermediaries, funds and corporates will need to confront a less flexible regime.
The Government’s proposals include:
- a central registry of beneficial share ownership. The Government is proposing that companies hold information on their beneficial share ownership and make that information publicly available through registration at Companies House. Alternatively, the information could be required to be made available to the tax authorities and enforcement agencies but not be made more widely available than that. For these purposes, a “beneficial owner” will be defined as anyone with an interest in more than 25 per cent of the shares or voting rights of a company or who otherwise exercises control over the way a company is run. Individuals who collectively with others hold more than 25 per cent and who agree to vote the shares together will be deemed to be a beneficial owner. The Government is proposing giving companies a legally enforceable right to obtain information regarding beneficial ownership from their shareholders. The Government is considering whether to extend its proposals to other legal entities, such as limited liability partnerships
- tackling the use of “nominee directors”. For these purposes, “nominee directors” are persons who are registered as the director of a company but who have in reality no role in relation to that company. According to the Department of Business, Information and Skills, on the assumption that an individual holding over 50 UK directorships is likely to be a nominee director, there are over 1,175 individuals acting as nominee directors in the UK and nearly 150,000 companies with a nominee director sitting on their board. One of the Government’s proposals is to require nominee directors to disclose that they have no actual role in the management of the company and to provide details of the real controllers. A concern in this context is the parent/subsidiary relationship as parent companies will often appoint a nominee to the board of their subsidiaries. Investors will also ordinarily appoint a nominee to represent their interests in their investee companies. These are perfectly good commercial practices and it is to be hoped that they will not in any way be undermined by whatever legislation comes out of the consultation
- prohibiting the issue use of “bearer shares”. Bearer shares are shares where proof of ownership is a certificate rather than registration in the company’s register of members. These are uncommon in the UK as companies are obliged by statute to maintain a register of members. As well as prohibiting the issue of new bearer shares, the proposals suggest a transitional period in which existing bearer shares can be converted into ordinary registered shares.
Walker Morris comment
The proposals are driven in part by a belief that a more transparent corporate regime is likely to enhance the UK’s attractiveness as a destination for inward investment. There will no doubt be cases where that is true but maybe also cases where it is not. The impact of the proposals, if implemented in their current form, will be felt most by wealthy individuals who have established corporate structures to protect family confidentiality.

Relaxation of the administrative burden for companies
The Government has been consulting on how it can reduce the administrative burden that weighs […]
The Government has been consulting on how it can reduce the administrative burden that weighs too heavily on companies. Legislation is likely to follow this year. What are the proposals?
The proposals form part of the Government’s “Red Tape Challenge”. This is a process by which burdensome regulation can be identified and consulted on, with an aim to simplifying or removing it. There has recently been a Red Tape consultation relating to company law, and in particular, for matters relating to Companies House filings, the focus of this article.
The proposals – all of which are likely to well received – are:
- completely removing the requirement to file an annual return and instead only filing if a specified event occurs
- aligning the dates for filing accounts to Companies House and HMRC
- scrapping the requirement for companies whose directors and shareholders are the same people to make their company registers available for public inspection at their registered office
- making it optional for private companies to hold their registers at Companies House
- stopping the record of a director’s date of birth, which is included on the form AP01 (the form recording the appointment of a director at Companies House) from being publicly available
- allowing or requiring companies to provide an email address, which can then be used for all communications with Companies House
- replacing the requirement to file a “consent to act” from new directors at Companies House with a simple confirmation that the company has the director’s consent to act
- simplifying the requirements for “statements of capital”, which have to be filed with Companies House on a number of different events.
Walker Morris comment
Whilst not particularly dramatic, the Government’s proposals are sensible and it is to be hoped they will be reflected in the legislation, expected to be published shortly.

Schemes of arrangement – accidental failure to give notice
Does the accidental failure to send a notice of a shareholders meeting to all the […]
Does the accidental failure to send a notice of a shareholders meeting to all the shareholders necessarily render the meeting invalid?
Under sections 895 to 899 of the Companies Act 2006, the steps required to effect a valid scheme of arrangement are:
- a court order summoning the members to vote on the scheme
- the company sending a notice to members and/or creditors convening the meeting(s) together with an explanatory statement on the effect of the proposed scheme
- attendees meeting to consider the proposed scheme
- approval by a majority in number representing three-quarters in value of the members or creditors who vote (or, if applicable, of each class of members or creditors)
- the company applying to court for the scheme to be sanctioned
the scheme becomes effective upon delivery of the sanction order to the Registrar of Companies.
In Re Randall & Quilter Investment Holdings plc [1] the notice of the annual general meeting was sent to those members whose name had appeared on the register on 10 May 2013, notwithstanding that the company had instructed the registrars that the record date should be 15 May 2013. There was a significant discrepancy between the numbers of members on the register on the two dates – there were 434 on the later date as against 384 on the earlier date, as a result of a placing of shares having been entered into the register between the two dates.
The issue for determination by the High Court at the hearing to sanction the proposed scheme was whether the accidental error invalidated the business conducted at the general meeting.
The court considered the provisions of the company’s articles of association which dealt with accidental omission and ruled that the accidental omission to give notice to the placees did not invalidate the meeting that took place. The court applied The Peninsular & Oriental Steam Navigation Company v Eller & Co [2] where the Court of Appeal held that in order for an accidental omission when convening a meeting of shareholders not to render the meeting invalid, there must have been a genuine attempt to serve the shareholders in accordance with their rights and that attempt had failed.
In considering the exercise of its discretion whether to sanction the scheme, notwithstanding the accidental failure to serve the notice and scheme documents on the placees, the court was swayed by the overwhelming majorities in favour of the scheme, both by number and value, of the members present and voting at the court meeting and that details of the scheme had been made known to the placees, albeit not in the form of scheme documents. In the circumstances no prejudice was suffered by the failure to serve notice correctly.
Walker Morris comment
Section 313(1) of the Companies Act 2006 provides that accidental failure to give notice of either a general meeting or a resolution to be moved at a general meeting to one or more persons does not render the meeting or resolution invalid. Section 313(1) may be overridden by a company’s articles except in relation to the situations set out in subsections 313(2)(a)-(c) (broadly, notice of meetings called or required by members). For companies with a large shareholder base it may be worthwhile supplementing the statutory provision by dealing expressly with the accidental failure or omission to give notice. Wording along the lines of the following is fairly typical:
“To the fullest extent permitted by law, the accidental omission to give notice of a meeting or send any other notice or circular relating to it or (in cases where proxies are sent out with the notice) the accidental omission to send such proxy to, or the non-receipt of notice of a meeting or other notice or circular relating to it or such proxy by, any person entitled to receive such notice shall not invalidate the proceedings at that meeting.”
[1] [2013] All ER (D) 47 (Jul)
[2] [2006] EWCA Civ 432

The crowdfunding alternative
Crowdfunding as a way of securing investment is beginning to gain ground on both sides […]
Crowdfunding as a way of securing investment is beginning to gain ground on both sides of the Atlantic. What are the current regulatory requirements and how is this likely to change?
Investment-based crowdfunding involves an entity seeking modest subscriptions from a large number of people, typically through a website operated by an authorised firm, as a means of raising funds. The subscribers receive a (modest) allotment of shares in return. (Loan-based crowdfunding, also known as peer-to-peer lending, is also possible – and is increasingly popular – but the focus of this article is investment-based crowdfunding.)
Investment-based crowdfunding platforms will carry on regulated activities – notably arranging investments – and will therefore require to be regulated by the Financial Conduct Authority (the FCA). At present, the FCA imposes restrictions on firms applying for authorisation to operate an investment-based crowdfunding platform. These are reviewed on a case-by-case basis but the FCA will usually restrict the operation to promotions to sophisticated or high net worth investors. However, this is not a formal procedure and in the autumn the FCA opened a consultation on how to regulate investment-based crowdfunding on a more structured basis. It is proposing that firms that communicate direct offer financial promotions for investment-based crowdfunding, restrict the offer to:
- clients who are certified or self-certified as sophisticated investors
- clients who are certified as high net worth investors
- clients who confirm that, in relation to the investment promoted, they will receive regular investment advice or investment management services from an authorised person
- clients who certify that they will not invest more than 10 per cent of their net investible portfolio in unlisted equity or unlisted debt securities.
Where advice is not provided to retail clients, the proposal is that firms will be expected to apply an appropriateness test before providing clients with promotions for unlisted equity or debt securities.
The proposal is for the new regime to become mandatory from 1 October 2014.
The new rules are likely to add to the regulatory burden on operators and make the process more burdensome for the “crowd”. The restrictive regime countenanced by the FCA is somewhat at odds with the position in Europe and the United States. The European Commission has been consulting on proposals aimed at facilitating and widening access to crowdfunding. In the US, the Securities and Exchange Commission has recently proposed a regulation which will provide an exemption from the registration and prospectus requirements of the US Securities Exchange Act 1934, which apply to public offerings, for crowdfunding of limited amounts.
Walker Morris comment
The next few years should show us whether investment-based crowdfunding will have a role to play in bridging funding gaps. The FCA has had plenty to deal with, since assuming some of the functions of the Financial Services Authority last year, not the least of which will be attempting to ensure that internet-based investment promotions are subject to adequate regulation.

TUPE changes – point to note
Changes to the TUPE Regulations came into effect on 31 January 2014. What are the […]
Changes to the TUPE Regulations came into effect on 31 January 2014. What are the main implications for corporate finance?
Generally speaking, the amendments to the TUPE Regulations are business-friendly. The Government appears to have listened to business concerns and the new regime should be, albeit only marginally, simpler than its predecessor. Purchasers of businesses – in respect of which TUPE will apply – should note the following:
- employee liability information – i.e. the information about transferring employees – will have to be provided earlier in the process. Currently, this must be provided 14 days before a transfer. For transfers from 1 May 2014, it must be provided at least 28 days in advance. This will need to be built into transactional timetables
- purchasers will be able to engage in pre-transfer collective redundancy consultation with the employees engaged in the target undertaking, provided the seller agrees. This is an important reform where post-transfer redundancies are anticipated and should offer greater certainty for all those affected by the transfer
- redundancies caused by relocation of the workforce following a transfer will no longer be automatically unfair
- purchasers will no longer be bound by future changes to contractual terms derived from collective agreements.
Walker Morris comment
The reforms though modest are welcome, particularly the ability for prospective purchasers to consult pre-transfer regarding collective redundancy and the change in the law which means that redundancy due to relocation following a transfer of an undertaking will no longer automatically be unfair.

Validity of an earn out notice
The negotiation of earn out provisions is often one of the pinch points in the […]
The negotiation of earn out provisions is often one of the pinch points in the negotiation of a share purchase agreement. The preparation and service of the earn out notice tends to attract less attention. This can be costly as a recent High Court judgment demonstrates.
In Barratt v Treatt plc [1] a share purchase agreement (the SPA) provided for an earn out to be calculated by reference to the pre-tax profits of the target group as shown in the audited accounts. The agreement also required the purchaser to carry out the initial calculation of the earn out and to provide notice of that calculation to the seller. Failure to do so by the purchaser would result in the calculation of the earn out being referred to an independent accountant for determination.
The purchaser duly served notice of its earn out calculation on the sellers. However, it was apparent from the notice that the calculation had been determined, at least in part, by reference to management accounts rather than the audited accounts as required by the SPA. The seller sought a declaration that the notice was invalid.
In arguing that the earn out notice was valid, the purchaser sought to draw a distinction between the contractual requirements regarding the validity of the earn out notice and the contractual requirements regarding the calculation of the earn out. It was, the purchaser maintained, possible for an earn out notice to be valid, so long as it set out the basis of the calculation in reasonable detail (as required by the SPA), even though the figure specified did not conform to the requirements of how the earn out was to be calculated.
The High Court declared the earn out notice to be invalid. The definition of the earn out was of central importance to the parties and admitted of no leeway to the parties as to its calculation. The clause requiring delivery of the earn out notice must be construed as meaning delivery of a notice including a calculation of the earn out on the sole basis permitted in the SPA. The fact that the calculation was based on management accounts as opposed to the audited accounts meant that it did not conform to the requirements of the SPA and, as such, was fatally flawed.
Consequently, the purchaser had not complied with the timescales set out in the SPA for serving an earn out notice, with the result that the determination must be submitted to an accountant, as stipulated in the SPA.
Walker Morris comment
Parties will usually ensure that they comply with the provisions of an SPA regarding method of serving notice and doing so within the specified timescales. This case is a reminder of the need to ensure that the content of the notice must also be correct or else the notice runs the risk of being declared invalid.
[1] [2013] EWHC 3561