Corporate Matters – January 2019


Is an agreement to agree ever enforceable?
In the recent case of Morris v Swanton Care & Community Ltd [2018], the Court […]
In the recent case of Morris v Swanton Care & Community Ltd [2018], the Court of Appeal provided a useful summary of the principles regarding agreements to agree and served a timely reminder of the dangers of leaving matters to be agreed at a later date. The court held that the claimant did not have an enforceable right to provide consultancy services during a period to be reasonably agreed between the parties to a share purchase agreement.
Background to the case
In November 2009, Mr Morris and his business partner sold their shares in Glenpath Holdings Limited (a company which provided residential care to people with autism, the Company) to Swanton Care & Community Limited (Swanton) for an initial consideration of approximately £16 million subject to certain adjustments and a deferred consideration payment to be achieved through an earn-out provision (the Earn-Out Consideration).
The terms of the share and purchase agreement (the SPA) said that:
“Mr Morris shall have the option for a period of 4 years from Completion and following such period such further period as shall reasonably be agreed between Mr Morris and the Buyer to provide the following services[…..]” (the Consultancy Services).
In return for Mr Morris providing the Consultancy Services the Buyer agreed to pay the Earn-Out Consideration.
There was no dispute that Mr Morris had the right to provide Consultancy Services during the initial four-year period of the SPA. However, Mr Morris claimed that, after the expiry of the four-year period, he was entitled to a further period of time to provide Consultancy Services. Towards the end of the four-year period, Mr Morris asked Swanton for a ‘reasonable extension,’ which was refused.
The High Court judge held that while Mr Morris had an enforceable right to provide Consultancy Services during the initial four-year period, he did not have an enforceable right to provide Consultancy Services during any further period because the agreement was effectively an agreement to agree. There was no mechanism set out in the SPA to enable the court to reach a conclusion as to the length of the further period and there was no objective standard to which the court could resort to determine the length of the further period.
Mr Morris appealed.
Court of Appeal decision
In dismissing the appeal, the Court of Appeal highlighted the following:
- At most, after the initial four year period, the agreement between the parties was an agreement to agree. Either party would be free to agree or to disagree about the matter. Accordingly, even though the SPA amounted to a binding agreement in other respects, the provision as to the further period of time was void for uncertainty.
- It was clear, as a matter of construction, that the further period required a further agreement between the parties if it was to follow on from the initial four-year period. The Court of Appeal rejected Mr Morris’ submissions that the judge had wrongly treated the initial four-year period and the further period as ‘wholly distinct’.
- The express terms of the SPA did not impose any framework or objective standard from which the court could determine what an appropriate further period should be. The length of the further period was not capable, in the absence of agreement by the parties, of being determined by some objective criteria of fairness or reasonableness.
WM comment
The case provides a useful summary of the principles regarding agreements to agree. The message to take home is that if the subject matter is important, do not be tempted to leave it to be agreed at a later date.

The hurdles to invoice discounting have been removed
The Business Contract Terms (Assignment of Receivables) Regulations 2018 are now in force. These regulations […]
The Business Contract Terms (Assignment of Receivables) Regulations 2018 are now in force. These regulations mean that parties entering into a contract on or after 31 December 2018 may no longer be able to prohibit the assignment of sums payable under the contract. In effect, this means that one party to a contract cannot prevent the other party from choosing who should receive payments under a contract for the supply of goods, services or intangible assets.
As we reported in December 2017 draft regulations were laid before Parliament in September of that year which proposed to make any term in a business contract that prohibited or restricted the assignment of receivables automatically ineffective. Those draft regulations were subsequently withdrawn amid concerns that they would create uncertainty in the finance markets.
However, the Government has since revisited the legislation and on 24 November 2018 the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) came into force. The Regulations apply to contracts (with a few exceptions described below) created on or after 31 December 2018 and mean that parties will no longer be able to prohibit the assignment of receivables in the UK. The Regulations make it clear that the prohibition is not retrospective and so the Regulations only apply to new contracts.
A term of a contract is ineffective if it prohibits the assignment of receivables, imposes a condition on assignment or prevents a person from valuing or enforcing the receivable. This includes if the term prevents the person wishing to assign from obtaining certain kinds of information. In effect, this means that one party to a contract cannot prevent the other party from choosing who should receive payments under a contract for the supply of goods, services or intangible assets.
The Regulations are aimed at improving access to invoice financing for small and medium-sized enterprises and the Government speculates that this will provide a £1 billion, long-term, boost to the economy. Invoice financing allows businesses to assign their right to be paid by a customer to a finance provider. In return the finance provider provides the business with up-front funds, thereby speeding up the business’ working capital cycle (provided the debtor ultimately pays the assigned invoice). Before 1 January 2019, smaller businesses would usually be forced to engage with larger customers on those customers’ standard terms, which often contained non-assignment clauses. As a result, some smaller businesses were restricted from engaging with invoice financing opportunities. This should now change.
The Regulations apply to contracts for the supply of goods, services or intangible assets where the supplier has the right to be paid under the contract. There are, however, a number of exceptions including:
- The Regulations do not apply if the person assigning the receivable is:
- a large enterprise or part of a large group (as defined by the Companies Act 2006); or
- a special purpose vehicle, set up to hold assets or finance commercial transactions involving it incurring a liability under an agreement of £10 million or more.
- The Regulations also do not apply to services of a financial nature. The definition of ‘financial nature’ is construed widely and includes, amongst other things, leasing, loan relationships and all types of securitisation and derivative transactions.
- The Regulations do not apply to contracts for the sale of a business or undertaking. However, for this exemption to apply, the contract must include a statement to that effect.
- The Regulations generally do not apply to contracts that relate to non-UK businesses. However, parties cannot contract out of the Regulations by changing the contract’s governing law, if the only reason for doing so is to circumvent the regulations.
- There are also a number of other types of contracts which the Regulations do not apply to, including consumer contracts, real estate contracts, public-private partnership contracts and rental contracts.
Practical application
The Regulations will lead to the need for certain changes to the drafting and implementation of commercial contracts:
- No assignment clauses. An eligible supplier will be able to assign their receivables to a debt purchaser without having to seek their customers’ prior consent.
- Confidentiality provisions. Confidentiality obligations can still be imposed on suppliers, except for any “essential information” that enables the identification of the receivables following assignment. This means information that enables the identification of receivables (so as to facilitate their collection) may be disclosed by a supplier to a third party purchaser for the purpose of receivables assignment or transfer without constituting a breach of confidentiality.
- Set-off. The Explanatory Note to the Regulations clarifies that a contractual right to set-off is not considered as a restriction on transfer of receivables for the purpose of the Regulations. Although the right to set-off is maintained, businesses may want to consider the practical impact of the Regulations on the mechanism to exercise the right to set-off, such as how cash flow will be affected if you are no longer able to consolidate future transactions to set-off against one original invoice that has already been assigned to a third party.
WM Comment
A key point to note is that the Regulations will not nullify the contract as a whole or, indeed, the whole of the clause restricting assignment, but only to the extent the Regulations are applicable to receivables. Small and medium sized companies seeking to take advantage of the new rules should seek advice before doing so. If you need advice on how the Regulations may affect your business please get in touch.

Executive remuneration – are you in step with current practice?
Guidance from the GC 100 and the Investment Association has been published to help companies […]
Guidance from the GC 100 and the Investment Association has been published to help companies implement the new reporting requirements on executive pay that came into force on 1 January 2019.
As reported in our September edition of Corporate Matters the Companies (Miscellaneous Reporting) Regulations 2018 (Regulations) came into force, for the most part, on 1 January 2019 introducing new company reporting requirements on executive pay, corporate governance arrangements, and how directors are having regard to the matters in section 172 of the Companies Act 2006.
In relation to executive pay, the Regulations require:
- the annual statement of the remuneration committee to include a summary of any discretion exercised by the committee in relation to the award of directors’ remuneration;
- companies to report how much of a director’s pay is attributable to share growth;
- companies over a certain size to report pay ratio information.
On 7 December 2018, the GC100 and Investor Group (GC 100) published an updated version of its Directors’ Remuneration Reporting Guidance to reflect the Regulations. The guidance addresses the key elements of directors’ remuneration reporting requirements and was originally published in September 2013. In 2018, in response to the Regulations, the GC 100 conducted a thorough review of the guidance. New material has been added to address the Regulations, and existing material has been revised where appropriate. The primary areas that were amended or are new include the exercise of discretion, considerations surrounding share price appreciation and reporting of pay ratios.
In a similar vein, on 22 November 2018, the Investment Association (IA) issued a press release announcing that it had published updated Principles of Remuneration. The updated principles set out investor expectations and best practice for how companies should pay their top executives in line with the new UK Corporate Governance Code and the Regulations.
Under the new principles, the IA will expect companies to:
- pay pension contributions to directors in line with the rate given to the majority of the rest of the workforce, rather than giving higher payments as a mechanism for increasing total remuneration;
- broaden the triggers under which malus and clawback provisions can be used to forfeit or recover remuneration beyond the current triggers of ‘gross misconduct’ and ‘misstatement of results’, in order to make them a more effective tool to recover bonuses. Companies should also set out the process for implementing malus and clawback, not simply the triggers;
- require directors to hold a proportion of their shares for a minimum of two years after their departure, so that they consider the long-term value of the company even after their departure; and
- adopt new pay ratio reporting requirements early, to maximise transparency over pay and ensure that there is accountability for high levels of pay internally.
In an open Letter of Introduction to the remuneration principles addressed to the chairs of remuneration committees of FTSE 350 companies, Andrew Ninian (Director, Stewardship and Corporate Governance at the IA) noted the concern of IA members that some companies are still not understanding or responding to the views of their shareholders on remuneration. The letter also sets out some key areas of focus for 2019 AGMs, including investor and remuneration committee relations, shareholder engagement, new reporting requirements, levels of remuneration and pay for performance.
WM comment
The team at Walker Morris can help if you are unclear as to how the Regulations will affect your reporting obligations for future financial years.

AIM Rules for Companies: public censure and fine for breaches of Rules 11 and 31
The London Stock Exchange has published a disciplinary notice in relation to the public censure […]
The London Stock Exchange has published a disciplinary notice in relation to the public censure and fine of Bushveld Minerals Limited for breaches of Rules 11 and 31 of the AIM Rules for Companies.
On 7 December 2018, the London Stock Exchange (LSE) announced that Bushveld Minerals Limited had been publicly censured and fined £700,000 (discounted to £490,000 for early settlement) for breaching AIM Rules 11 (General disclosure of price sensitive information) and 31 (AIM company and directors’ responsibility for compliance). The LSE stated that it was publishing details of the public censure to educate the market on the expected standards of conduct for AIM companies under the AIM Rules.
Bushveld Minerals Limited (the Company) was admitted to AIM on 26 March 2012 and was, at the time of the relevant events, a mineral development company with interests in a portfolio of vanadium and titanium-bearing iron ore and tin assets and a coal project in Southern Africa.
In the early part of 2016, the Company was considering a transaction which, if completed, would constitute a reverse takeover under AIM Rule 14. The exclusivity agreement for the transaction required the Company to deposit $500,000 with its lawyers, subject to an undertaking to release the funds to the proposed seller upon fulfilment of certain conditions (the Exclusivity Fee). The Exclusivity Fee was a material sum in the context of the Company’s financial position and, before the undertaking was given, the Company’s nominated advisor (nomad) explicitly advised the Company that the binding obligation to pay the Exclusivity Fee would trigger a ‘without delay disclosure obligation’ under AIM Rule 11 because of its materiality. In addition, such notification would involve disclosing the reverse takeover and, pursuant to the guidance to AIM Rule 14, the Company’s securities would be suspended.
The Company wanted to avoid (or at least delay) suspension of its shares until it was confident that the transaction would proceed. It considered that a suspension would be prejudicial to the Company’s plans to complete a fundraising to provide funds for the transaction, to fund the development of its existing assets and, it hoped, reduce the materiality of the Exclusivity Fee. It sought advice from its lawyers on its AIM Rules disclosure obligations and the advice received conflicted with that of the nomad. In their view, a ‘without delay disclosure’ was not necessary.
At the same time as arguing against the nomad’s advice, the Company asked it to liaise with the LSE to discuss whether, upon notification, a suspension of its shares was required. In the meantime, the undertaking was given on 7 April 2016 without the nomad’s knowledge. The matter only came to light when the Company discussed with the nomad a development regarding the status of the Company’s fundraising activities. Following this, details of the exclusivity agreement, the undertaking and the Exclusivity Fee were disclosed on 22 April 2016 and the Company’s securities were suspended in accordance with AIM Rule 14.
Breaches of the AIM Rules
The LSE determined that the Company had breached:
- AIM Rule 11 by failing to comply with its notice obligations to notify without delay when the undertaking was given, despite being advised by its nomad of the AIM Rules implications. While an AIM company may delay disclosure of information during negotiations which are kept confidential, in these circumstances, giving the undertaking created a binding obligation in relation to the Exclusivity Fee which was a new development requiring disclosure without delay; and
- AIM Rule 31 by failing to provide its nomad with information concerning the provision of the undertaking, in circumstances where it knew or ought to have known that the nomad required this to carry out its responsibilities owed to the LSE. As a result, the Company also knew or ought to have known that the LSE would not be in possession of facts and information which were relevant to its discussions with the nomad.
Expected standards for AIM companies
During the judgment the LSE emphasised the importance of the nomad’s role in advising and guiding AIM companies on their Rule 11 disclosure obligations, and highlighted that obtaining separate legal advice on the interpretation of the AIM Rules does not override the nomad’s advice, or justify or mitigate a breach of the AIM Rules. As the LSE has previously stated publicly, the application and interpretation of AIM Rule 11 should not be approached in a narrow way and the advice and guidance of a nomad is particularly important when considering disclosure obligations, for example arising under AIM Rule 11.
WM comment
The AIM regulatory model provides an AIM company with the benefit of continued support and guidance from a nominated adviser who is authorised by the LSE as the designated AIM specialist. The nomad has the depth of knowledge and experience in dealing with and applying the AIM Rules through its own day to day experience with AIM companies and also through its liaison with the LSE. The advice and guidance of a nomad is designed to support an AIM company’s compliance with its AIM Rules obligations and is particularly important when an AIM company is considering its disclosure obligations.

Can unlawful dividends be re-classified as salary?
In the recent case of Global Corporation Limited v Hale [2018] EWCA Civ 2618, the […]
In the recent case of Global Corporation Limited v Hale [2018] EWCA Civ 2618, the Court of Appeal considered whether payments to the director and shareholder of a company must be repaid on the basis that they constituted unlawful dividends pursuant to section 830 of the Companies Act 2006. The court confirmed that the legality of a payment to directors must be tested at the time when it is made. Any unlawful distribution cannot be ‘cured’ by subsequently treating it as remuneration.
Background
The respondent in this case was a director and shareholder of an engineering company, Powerstation UK Limited (the Company), which specialised in tuning motor engines. The respondent worked full time in the business and received regular monthly payments of around £1,800. On the advice of accountants, the monthly payments were treated as salary up to the personal allowance limit and dividends thereafter. At the end of the Company’s accounting period, the Company’s accountant would confirm whether or not the Company had sufficient distributable reserves out of which to lawfully pay a dividend. If there were not, the payments would be re-characterised for accounting purposes as salary payments and PAYE paid.
The Company was adversely affected by the financial crisis and went into liquidation on 25 November 2015. The liquidator sought repayment of the sums paid to the directors during the period when the Company had no distributable reserves on the basis that the dividends were unlawful distributions under section 830 of the Companies Act 2006. The claim was assigned to Global Corporate Limited.
High Court decision
At first instance, HHJ Mathews found that the decision to classify the payments as dividends was made “only in principle, with the formal decision left to be made at the year end”. On this basis, the Judge found that the payments were not dividends for the purposes of section 830 of the Companies Act 2006.
Given that the payments were found not to be dividends, the question arose as to whether the payments were made on any proper basis and, if not, whether the receipt of those payments constituted a breach of the respondent’s fiduciary duties. The judge found that the Company was obliged to pay the respondent a reasonable sum for his services, as the Company would be unjustly enriched if it received valuable services from him for free. On this basis, the judge found that the director was entitled to retain the payments and that the payments did not give rise to a breach of fiduciary duty. The decision was appealed.
Court of Appeal decision
The Court of Appeal stated that the relevant question was whether the payments constituted dividends at the time they were made. It was found that the payments clearly were dividends, given that they were expressly declared by the directors to be interim dividends and were taxed accordingly.
It was immaterial that the payment may subsequently have been re-characterised as remuneration. The Court of Appeal found that “the most [a re-characterisation] can do is to allow the monies to be notionally repaid and then re-applied in a way which does not contravene the provisions of s.830 and is otherwise a lawful application of the assets of the Company.” Lord Justice Patten went on to say “…it is immaterial that a subsequent realisation that the distribution should not have been made would prompt their being treated as remuneration. That cannot cure the illegality of the original payment.”
The Court of Appeal also doubted the judge’s finding that companies were bound by an obligation to pay reasonable compensation to directors and noted the decision in Guinness Plc v Saunders [1990] 2 AC 663, in which the House of Lords held that the law would not imply a contract for remuneration when such a contract could only be agreed under the articles of association by an appropriate resolution of the board. It was also noted that, even if a claim for unjust enrichment were to succeed, this would need to be proved for in the liquidation, rather than simply allowing the Respondent to retain the payments.
WM Comment
The case brings clarification to this area of the law and makes clear that director-shareholders cannot simply draw funds from the company on an ad hoc basis and avoid subsequent liability by referring to the value of work they provided the company. This clarification will no doubt be welcomed by liquidators.
As far as director-shareholders are concerned, there are obvious tax advantages in drawing compensation by way of dividend rather than as a salary, although this case highlights the risks of doing so. Any dividend paid at a time when the company has insufficient distributable profits is unlawful. This principle applies regardless of whether the company is currently trading profitably. The most prudent approach for director-shareholders of companies with unascertained distributable reserves would be to take a salary rather than a dividend.
Director-shareholders cannot simply hope to re-classify such dividends if necessary and will likely be required to repay the sums in the event of a challenge. Once such dividends are repaid to the Company, it appears unlikely that a company would be required to pay the director a reasonable sum for his services under the doctrine of unjust enrichment.

Findings of the review into the FRC have been published
The Government has published the final report of the independent review led by Sir John […]
The Government has published the final report of the independent review led by Sir John Kingman into the Financial Reporting Council.
Just before Christmas the Government published Sir John Kingman’s independent review of the Financial Reporting Council (FRC). The review puts forward broad proposals for a new organisation with a new mandate, clarity of purpose, leadership and powers in order to create a regulator that is an example of best practice in governance, transparency and independence in UK companies.
The review contains 82 recommendations of which the key ones are as follows:
- the FRC should be replaced as soon as possible with a new independent regulator, with clear statutory powers and objectives and with a proposed name of ‘Audit, Reporting and Governance Authority’
- the new body should be accountable to Parliament, with a remit letter to the regulator at least once each Parliament
- the new regulator should be given a range of extensive powers in the interests of averting major corporate failures
- the regulator should have an overarching duty to promote the interests of consumers of financial information, not producers
- a new board should be appointed, and should not be self-perpetuating, as it currently is
- the regulator should be better equipped to ensure its work and decision-making is informed by market analysis
- the current self-regulatory model for the largest audit firms should end
- the new regulator should be required to promote brevity and comprehensibility in accounts and annual reports
- the regulator’s corporate reporting work should be extended to cover the entire annual report, with stronger powers to require documents and other relevant information in order to conduct that review work
- the regulator needs to engage at a more senior level in a much wider and deeper dialogue with UK investors
- the regulator should not be funded on a voluntary basis. A new statutory levy should be put in place
- the UK Stewardship Code and the viability statement should be fundamentally reformed or abolished.
WM comment
The Government’s response to the review will be published in due course although it has already stated that it will take forward the recommendation to replace the FRC. A number of the recommendations will require primary legislation but others could be put in place in the short term.

Reforms to limited partnership law move a step closer
The Government has announced plans to reform limited partnership law to combat concerns that some […]
The Government has announced plans to reform limited partnership law to combat concerns that some limited partnerships are used as vehicles for criminal activity.
As reported in May 2018, the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation last year seeking views on proposals to reform the law of limited partnerships (LPs). The proposals were intended to limit the misuse of LPs, particularly Scottish LPs, believed to have been involved in laundering proceeds of crime from abroad. Scottish LPs have a distinct legal personality separate from the partners themselves and can own property and enter into contracts.
BEIS has now published its response to the consultation which sets out a range of proposals which attempt to limit the potential misuse of LPs but at the same time ensure that they remain attractive as an investment vehicle. The key proposals are:
- those registering LPs must demonstrate that they are registered with an anti-money laundering supervised agent, such as an accountant or lawyer, or an overseas equivalent
- the LP must demonstrate an ongoing link to the UK, for example by keeping its principal place of business in the UK
- all LPs must submit a confirmation statement at least every 12 months to Companies House to ensure their information is accurate and up to date
- Companies House will be given powers to strike off dissolved LPs and LPs which are not carrying on business.
WM comment
The proposed reforms will apply to all LPs in the UK and will be introduced ‘as soon as Parliamentary time allows’. When this will be in practice is anyone’s guess, but we will keep you updated with its progress.

The Wates Corporate Governance Principles for large private companies
Large private companies will soon be subject to new corporate governance obligations. The Wates Principles […]
Large private companies will soon be subject to new corporate governance obligations. The Wates Principles are intended to help companies comply with these new obligations.
On 10 December 2018, the Financial Reporting Council (FRC) issued a press release announcing that it had published the Wates Corporate Governance Principles for Large Private Companies. The Wates Principles have been developed by a coalition established by the FRC and chaired by James Wates CBE following a consultation which was launched by the FRC on 13 June 2018.
The Wates Principles are intended to help large private companies to meet their obligations under the Companies (Miscellaneous Reporting) Regulations 2018, which require large private companies to disclose their corporate governance arrangements for financial years beginning on or after 1 January 2019. The new reporting requirement applies to all companies that satisfy either or both of the following conditions: (i) the company has more than 2,000 employees; and/or (ii) the company has a turnover of more than £200 million and a balance sheet total of more than £2 billion. Large private companies will need to include a statement in their directors’ report which states:
- which corporate governance code (if any) the company applied in the financial year
- how the company applied that code
- if the company departed from the code, how it departed and why
The Wates Principles comprise six principles together with guidance under each principle. They adopt an ‘apply and explain’ approach, so that boards should apply each principle by considering them individually within the context of the company’s specific circumstances.
The six principles are:
- principle one – Purpose and Leadership: An effective board develops and promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose
- principle two – Board Composition: Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company
- principle three – Director Responsibilities: The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge
- principle four – Opportunity and risk: A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks
- principle five – Remuneration: A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company
- principle six – Stakeholder relationships and engagement: Directors should foster effective stakeholder relationships aligned to the board’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.
WM comment
Large private companies which are required to prepare a statement of corporate governance arrangements are not obliged to apply the Wates Principles. There are other options such as the UK Corporate Governance Code and the Quoted Companies Alliance corporate governance code. The corporate team at Walker Morris can help you understand which code might be most appropriate for your company.