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Corporate Matters – June 2014

Corporate Matters – June 2014

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04/06/2014

ABI recommendation on lock-up arrangements

On an IPO or secondary placing, the underwriters will generally require the company’s key management […]

On an IPO or secondary placing, the underwriters will generally require the company’s key management and shareholders be restricted from selling their shares without the underwriters’ consent for a set period. Such lock-up arrangement may also include a subsequent orderly marketing period during which shares may be sold but with the relevant shareholders only able to trade through the investment bank managing the IPO. The terms of the lock-up may permit one-off transfers in certain circumstances (e.g. to immediate family members or a family trust, subject to the provision that the transferee agrees to adhere to the lock-up or the acceptance of a takeover offer).

The Association of British Insurers (the ABI) has published its recommended best practice in relation to lock-up agreements. It notes that increasingly banks are, at their sole discretion, waiving the lock-up before the stated expiry date. The ABI considers this to be an unwelcome development but accepts that it is driven by a perceived need on the part of banks to retain flexibility in this area.

In its recommendations, the ABI distinguishes between lock-ups which may be broken at the sole discretion of the bank – soft lock-ups – and those in which the shareholder may not sell further shares at all or only in very limited, objectively definable, circumstances – hard lock-ups.

The ABI recommends that:

the period of the lock-up and the circumstances in which any sale may take place prior to its expiry (in particular the extent to which any period of the lock-up is soft) should be clearly disclosed
the appropriate period and terms of a lock-up will depend on the circumstances and are a matter for the vendor and banks. However, in general, (i) soft lock-ups are only appropriate for periods of relatively short duration; (ii) for periods of longer duration, it is appropriate for the lock-up arrangement to specify an initial period of hard lock-up; and (iii) any waiver at the sole discretion of the banks should only be given after careful consideration and after full account has been taken of the overall merits from the perspective of investors and of the need to maintain market integrity. Any such waiver would generally only be expected to be granted at a time close to the stated expiry of the lock-up.

WM comment
The ABI’s intervention is unsurprising. It can be misleading to the market for an announcement that shares are subject to a lock-up arrangement only for the bank to waive that arrangement.

Whilst not legally binding, quoted companies will be expected to follow the ABI recommendations. We can therefore expect the ABI’s recommendations to become standard market practice.

Enforcement of security over shares may trigger the obligation to make a mandatory offer

Rule 9.1 of the Takeover Code provides that, except with the consent of the Takeover […]

Rule 9.1 of the Takeover Code provides that, except with the consent of the Takeover Panel, when any person, together with any concert party, is interested in shares which carry not less than 30 per cent. of the voting rights of a company but does not hold shares carrying more than 50 per cent. of such voting rights and such person, or any concert party, acquires an interest in any other shares which increases the percentage of shares carrying voting rights in which he is interested, such person must make a mandatory cash offer for the company.

The Takeover Code goes on to provide, in Note 2 of the Notes on Dispensations from Rule 9, that where shares are charged as security for a loan and, as a result of enforcement, the lender would otherwise become obliged to make a mandatory offer under Rule 9, the Takeover Panel will not normally require such an offer if sufficient interests in shares are disposed of within a limited period to persons unconnected with such lender so as to reduce the percentage of shares with voting rights held by the lender and any concert party to the level they were before the enforcement of the loan.

The Takeover Panel has recently provided an illustration of its approach to Rule 9 dispensations where the requirement to make a mandatory offer would arise from the enforcement of security over shares by a concert party of the existing 30 per cent shareholder. The shareholder, Mercurius, held just over 30 per cent of the shares with voting rights in OIM, a company to which the Takeover Code applied. Mercurius assigned the benefit of a loan, secured over shares in OIM, to a third party, Budeste. Budeste enforced its security, thereby acquiring a stake of just under 15 per cent in OIM. It later reduced its shareholding to just under 13 per cent.

The Panel ruled that Mercurius and Budeste were acting in concert at all material times. However, in line with Note 2 of the Notes on Dispensations from Rule 9, the Panel waived the requirement for a mandatory offer. Instead, it ruled that the aggregate shareholding of Mercurius and Budeste must be reduced to 30.13 per cent. – the size of Mercurius’ shareholding before Budeste enforced its security.

Pending such disposal, the Panel also ruled that the aggregate number of votes that could be cast by Mercurius and Budeste at a general meeting of OIM was 30.13 per cent. of the votes exercisable at such meeting.

WM comment
The case is an interesting illustration of the approach the Takeover Panel will take where a concert party of an existing 30 per cent shareholder enforces its security over shares in a public company.

Enhancing corporate transparency

We have reported previously on the Government’s proposals to enhance corporate transparency by the creation […]

We have reported previously on the Government’s proposals to enhance corporate transparency by the creation of a central registry of beneficial share ownership; tackling the use of “nominee directors” and prohibiting the use of “bearer shares”.

The Government has now published its response to its consultation paper and indicated that it intends to continue with the bulk of its proposals. These include:

the creation of a central registry of company beneficial ownership information. The definition of a beneficial owner for these purposes is a person who ultimately holds 25 per cent. of the company’s shares or voting rights or who otherwise exercises control over the management of the company, although the Government is seeking further feedback on this. The new regime will also apply to limited liability partnerships
companies will be obliged to obtain and maintain details of their beneficial owners and to provide that information to Companies House
a prohibition on new bearer shares and the compulsory cancellation of existing bearer shares. The Government intends to specify a period (nine months is proposed) during which existing holders of bearer shares must surrender their bearer share warrants for conversion to the relevant registered shares.
a prohibition on corporate directors. There will be exceptions to this where corporate directors may be of value and represent a low risk, such as where they are used in the group context. The Government is proposing a one-year transitional period
amendments to the disqualification regime, including allowing a director’s overseas misconduct to be taken into account in disqualification proceedings and to provide for directors to compensate those suffering identifiable loss as a result of their misconduct. The Government also intends to allow insolvency office holders to assign insolvency actions, such as for fraudulent or wrongful trading, and to extend the period within which disqualification proceedings may be commenced after an insolvency from two to three years.

The Government has decided not to proceed with its proposal for a register of nominee directors. Instead, it proposes further measures to enhance directors’ awareness of their duties and potential liabilities.

The legislation will be implemented as soon as Parliamentary time allows. The Government will have to spend some of that Parliamentary team fine-tuning transitional arrangements.

WM comment
The Government anticipates that a more transparent regime will attract greater inward investment. Conversely, wealthy individuals who have established corporate structures to protect family confidentiality may find, once the draft legislation is published, that they need to revisit those structures.

Private censure and fine for breach of AIM Rules

An unnamed AIM company has been privately censured and fined £90,000 by the AIM Executive […]

An unnamed AIM company has been privately censured and fined £90,000 by the AIM Executive Panel. The company failed to notify the market, without delay, of transactions with known related parties, in breach of Rule 13 of the AIM Rules for Companies. It also breached Rule 31 by failing to take into account the advice of its nominated adviser (nomad) and failing to provide the nomad with complete information. Broadly, ‘related party’ under the AIM Rules means any current or recent director or substantial shareholder (or any associate of either). For these purposes ‘recent’ means the 12-month period preceding the transaction and substantial shareholder means anyone who controls the exercise of 10 per cent. or more of the votes able to be cast at a general meeting.

Rule 13 provides that where any transaction is proposed between the company and a related party and the relevant ‘percentage ratios’ equal 5 per cent. or more, the company must notify a RIS without delay as soon as the terms of the agreement are agreed, setting out information specified in Schedule 4 to the AIM Company Rules; the name of the related party and the nature and extent of its interest in the transaction; and that the directors believe, having consulted with its nomad, that the terms of the transaction are fair and reasonable from the perspective of the shareholders.

In practice, the most troublesome aspect of related party transactions is determining whether the counterparty is or is not a “related party”. There is a lengthy definition in the AIM Rules and professional advice should be sought where there is any doubt. As this disciplinary notice shows, the nomad must be kept properly informed as well. Indeed, to quote from the notice: “The Exchange would emphasise the importance of the role of the nomad to advise and guide AIM companies on their AIM Rules obligations. In particular, it is essential that an AIM company communicates in an open and honest manner with its nomad and takes into account the advice of the nomad on AIM Rules compliance”.

The fine could well have been higher. The Exchange took account of the company’s previous good record of compliance, its cooperation with the investigation and the lack of any discernible market impact arising from the breach.

WM comment
When considering any proposed transaction, it is imperative AIM companies involve their nomads who can help to determine whether it is a transaction with a related party. Companies should also remember that they should have regard to section 190 of the Companies Act 2006 which deals with substantial property transactions involving directors (and persons connected with directors).

Restrictive covenants and the importance of context

In Merlin Financial Consultants Ltd v Cooper [1], Mr Cooper was a financial adviser employed […]

In Merlin Financial Consultants Ltd v Cooper [1], Mr Cooper was a financial adviser employed by Merlin. He had already established a considerable reputation and following before joining Merlin. When he joined Merlin he signed two contracts: the first was an employment contract, which contained a post-termination covenant preventing him from competing with Merlin for six months following termination of his employment.

The second contract was described as a “goodwill agreement”. Under this agreement Merlin purchased the goodwill in, and the right to receiver future income from Mr Cooper’s client base. This agreement contained a post-termination covenant by which for a period of one year after termination of his employment, Mr Cooper agreed not, in any part of the UK, to “be engaged, concerned or interested in, or provide financial support or management services or technical, commercial or professional advice to any other business which supplies goods and/or services which are competitive with or of the type supplied by [Merlin]”.

Mr Cooper decided to leave Merlin and set up in competition. Merlin brought a breach of contract claim against him and Mr Cooper challenged the validity of the restrictive covenant in the goodwill agreement.

It is settled law that a restraint of trade clause must not go beyond what is reasonable to protect the legitimate business interests of the party seeking to enforce it. In this regard the court emphasised the distinction between a business sale agreement – which is in effect what the goodwill agreement was – and an employment contract. The parties to a business sale agreement were to be taken to have a greater equality of bargaining power. In the words of the court: “Where the parties are of equal bargaining power, the court is slow to intervene to prevent the enforceability of what has been freely agreed, as they are the best judges of what is reasonable as between themselves, but if the restraint goes further than is reasonably necessary to protect a legitimate business interest, it will be held unenforceable.” In this case, the restraint of trade clause did not go beyond what was necessary to protect Merlin’s legitimate business interest and the covenant was enforceable.

The court also noted that there were instances in the financial services sector where 12-month post-termination restrictions had been upheld in contracts of employment, reflecting the importance of the personal relationship between the adviser and client. It also rejected Mr Cooper’s argument that the UK was too wide a geographical territory as his client base was primarily in the South East and London; the court explained that the case law showed the financial services industry was to be considered a single geographic market and that was becoming more the case, rather than less, with developing means of electronic communication.

WM comment
The case is a reminder that an assessment of the validity of a post-termination covenant must always be made on its own facts – who the individual is, what is his or her line of work, where are their clients located. It also reinforces the distinction the courts make between covenants in an employment contract and those in a business sale agreement.

[1] [2014] EWHC 1196 (QB)

Simplification of filing requirements

In our last newsletter we reported that the Government was consulting on proposals to relax […]

In our last newsletter we reported that the Government was consulting on proposals to relax the administrative burden for companies, in particular in respect of corporate filing. The Government has now published its responses to the consultation. The key points to note are:

instead of the requirement to complete an annual return at a set point each year, companies will be required to “check, notify changes if necessary and confirm” the statutory information at least once in every 12-month period. This could be, for example, on the appointment of a new director
private (but not public) companies will have the option of not maintaining some or all of the following registers: the register of directors, the register of directors’ residential addresses, the register of secretaries, the register of members and the proposed new register of beneficial ownership. If the company exercises this option it will need to ensure that the information on the public record is up to date and includes the addresses of members and the full date of birth of directors
full details of a director’s date of birth will no longer be available on the public register (to combat the risk of identity fraud). Instead, the public register will show just the month and year of birth. However, where a private company elects to dispense with the requirement to maintain company registers, the full date of birth will be included on the public register
companies will only be required to show the aggregate amount unpaid on shares on the statement of capital. Updated statements of capital will continue to be required following allotments of shares
details of subsidiaries should be listed in one place, probably the accounts
Companies House will facilitate electronic communications so that companies will be able to send all correspondence and statutory notices electronically.

The Government will legislate to make these changes “when Parliamentary time permits”.

WM comment
The Government’s proposals do not herald a major shake-up of company law. They are, however, sensible and to be welcomed.

The meaning of “issued and served” in a limitation of liability clause

A corporate sale and purchase agreement will typically contain provision for the service of notices. […]

A corporate sale and purchase agreement will typically contain provision for the service of notices. In particular, the schedule of limitations will typically provide for a cut-off date by which the buyer must notify the seller of any potential claims, and a further time period within which legal proceedings must be commenced and served.

The Civil Procedure Rules state the following with regard to service of proceedings:

CPR 7.5 – rule for despatching a claim form. Where the claim form must be dispatched within the jurisdiction, the claimant must “complete the [prescribed] step” in relation to the chosen method of service before 12 midnight on the calendar day four months after the date of issue of the claim form
CPR 6.14 – the claim form is deemed served on the second business day after despatch (under CPR 7.5), regardless of the method of service deployed. Further, the deemed date of service is the date on which the claim form will be legally treated as having arrived, irrespective of whether or not it has arrived.

In T & L Sugars Ltd v Tate & Lyle Industries Ltd [1]

the seller would not be liable for any claim unless notice of the claim was given by the buyer to the seller within 18 months of completion
any claim in respect of which notice had been given had to be issued and served on the seller within 12 months after the notice was given, or it would be deemed to have been irrevocably withdrawn.

The buyer notified various claims to the seller on 30 March 2012, the last day of the 18-month period in which it was contractually entitled to do so. On 27 March 2013, its solicitors hand-delivered the original copy of the claim form and particulars of claim on the seller’s solicitors.

The seller argued that the claims were contractually deemed to have been irrevocably withdrawn because they had not been issued and served in accordance with the CPR. In particular, the deeming provisions in CPR 6.14 meant that proceedings were not served until they were deemed to be served on the second business day after they had been delivered which, because of the Easter break, was not until 2 April 2103. The buyer, so the seller maintained, was therefore out of time.

The judge ruled that the word “served” meant service in accordance with the CPR. This was the opposite conclusion from that reached by the judge in another recent case, Ageas (UK) Ltd v Kwik-Fit (GB) Ltd [2], where the judge had ruled that the word “service” in a very similar context, did not mean service in accordance with the CPR.

However, the judge went on to hold that it was CPR 7.5 and not CPR 6.14 which prevailed for the purposes of determining when actual service took place. Accordingly, the documents had been served on 27 March and within the 12-month time limit.

WM comment
The decision in this case leaves two directly conflicting decisions of equal authority, as both are High Court decisions, on the question of whether “serve” means service in accordance with the CPR. Best practice will be that if the parties want the CPR to apply they should say so and, similarly, they should make clear that the CPR do not apply if they do not want them to.

[1] [2014] EWHC 1066
[2] [2013] EWHC 3261

The new rules for Controlling Shareholders

The new provisions regarding Controlling Shareholders are set out primarily in Listing Rule 6. This […]

The new provisions regarding Controlling Shareholders are set out primarily in Listing Rule 6. This Listing Rule sets out requirements where the company has a “Controlling Shareholder”. A Controlling Shareholder is a person who on its own or who together with any person with whom it acts in concert, exercises or controls 30 per cent or more of the votes able to be cast on all or substantially all matters at general meetings of the company. There is no definition of parties acting in concert.

There is a requirement for a written binding agreement between the company and its Controlling Shareholder. The agreement must remain in place as long as the company continues to have a Controlling Shareholder. There are mandatory content requirements for this agreement, designed to ensure the company’s independence from the Controlling Shareholder:

transactions and relationships with the Controlling Shareholder (and its associates) will be conducted at arm’s length and on normal commercial terms
no Controlling Shareholder or any of its associates will take any action that would have the effect of preventing the company from complying with its obligations under the Listing Rules
no Controlling Shareholder or any of its associates will propose or procure the proposal of a shareholder resolution which is intended or appears to be intended to circumvent the proper application of the Listing Rules.

A relationship agreement will typically cover matters beyond the three requirements just referred to. The Financial Conduct Authority (FCA) – the authority responsible for ensuring compliance with the Listing Rules – will not monitor those provisions although any such provisions must not be in breach of the related party transactions rules, set out in Listing Rule 11.

The Listing Rules contain provisions regarding the election of independent directors where the company has a Controlling Shareholder. A company with a Controlling Shareholder will have to ensure that the election or re-election of any independent director must be approved by separate resolutions of:

the shareholders; and
the independent shareholders (i.e. not including the Controlling Shareholder).

If either resolution is defeated, the company may propose a further resolution to elect or re-elect the proposed independent director provided that the further resolution must not be voted on within 90 days from the date of the original vote and may then be passed by a vote of the shareholders of the company voting as a single class. There will have to be a provision providing for this in the articles of association and it may be that the articles of association need to be amended to allow for this.

Listed companies with a Controlling Shareholder must include a statement by the board to the effect that the company has entered into a relationship agreement containing the independence undertakings just described and that the independence undertakings have been complied with throughout the accounting period. If either of these statements cannot be made, the company will have to explain why not. In addition, if an independent director refuses to support the board’s statement, the statement will have to say so.

If the Controlling Shareholder refuses to sign a relationship agreement, or the independence provisions in a relationship agreement are not adhered to, or an independent director disagrees with the board’s assessment of whether the independence provisions have been complied with, a regime of “enhanced oversight measures” will apply. This means that the exemptions from the full application of the related party rules in Chapter 11 of the Listing Rules will be suspended. In other words, ordinary course transactions, small transactions and other ordinarily exempt transactions will require shareholder approval (although the FCA would retain the right to waive this in respect of ordinary course transactions on a case by case basis). This regime would apply until a “clean” compliance statement is made in a subsequent annual report. The “enhanced oversight regime” does not detract from the other sanctions at the FCA’s disposal, including ultimately its right to cancel the listing.

WM comment
Premium listed companies should consider whether they may be subject to the Controlling Shareholder regime. This may not be straightforward as the definition of Controlling Shareholder includes associates and concert parties. Please speak to us if you are unsure. If the regime does apply, or may apply in future, it may be necessary to amend the articles of association.

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