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Corporate Matters – September 2015

Corporate Matters – September 2015

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£4.65 million fine for breach of the Listing Rules

The Financial Conduct Authority (FCA) has fined Asia Resource Minerals plc (ARM), formerly Bumi plc, […]

The Financial Conduct Authority (FCA) has fined Asia Resource Minerals plc (ARM), formerly Bumi plc, just over £4.65 million for breaches of the Listing Rules (LR) and Disclosure Rules and Transparency Rules (DTR).

ARM was admitted to the premium section of the Official List in June 2011. In April 2013, ARM notified the UK Listing Authority that it would be unable to publish its 2012 annual report within the deadline set by DTR 4, owing to an ongoing review of the integrity of a number of items on the balance sheet of a subsidiary company. This included a review of historic potential related party transactions. ARM’s shares were suspended from trading for three months.

The FCA found that between the date of its admission to premium listing in June 2011 and July 2013, ARM failed to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations, in breach of Listing Principle 2. It found also that ARM had breached LR11 in respect of its treatment of related party transactions and LR8 with regard to the need to consult a sponsor when proposing to enter into a transaction that is, or may be, a related party transaction. The belated discovery of these failings meant that ARM was unable to publish its 2012 annual financial report within the four-month timeframe stipulated by DTR4.

As a consequence of these failings, according to the FCA, investors were deprived of the level of protection that should have been afforded by the Listing Rules.

ARM settled early with the FCA, qualifying it for a 30 per cent reduction in penalty.

This is the second time that the FCA has issued a final notice in relation to a listed company’s failure to comply with the Listing Rules applicable to related party transactions, Exillon Energy plc being the first in 2012. The ARM board had actually circulated the final notice in respect of Exillon Energy to senior management with a reminder of the need to comply with the Listing Rules; however, no further steps were taken to ensure the effectiveness of the group’s processes for related party transactions, which the FCA considered to be an aggravating feature, leading to an increase in the level of the fine.

Listed companies are required by LR 8.2.3R to obtain the guidance of a sponsor when proposing to enter into a transaction that is, or may be, a related party transaction, in order to assess the application of the LR and DTR.

WM comment

In this case ARM had in place policies and procedures to manage related party transactions, including a conflicts committee whose remit included monitoring related party transactions. However, that committee apparently met only infrequently and was hampered by a lack of disclosure by management of the subsidiary, which was an Indonesian company. A training workshop was held but the subsidiary’s management failed to attend. The case highlights that it is not enough to have policies in place; they need to be adhered to, and training needs to be delivered to relevant people (with refresher training where necessary).

Ban on corporate directors delayed until 2016

The Government has recently announced that the restrictions on corporate directors, which were originally due […]

The Government has recently announced that the restrictions on corporate directors, which were originally due to be implemented in October 2015 under the Small Business, Enterprise and Employment Act 2015 (the Act), have been delayed until October 2016.

As a reminder, the Act aims to increase transparency about who is acting as a director of a company by restricting the practice of companies acting as corporate directors of other companies in certain circumstances.

Companies will need to review whether or not their existing corporate director will qualify as a “permitted corporate director” under (as yet unpublished) regulations which will contain exceptions to the new rules. It is the argument around the scope of those exceptions which lies at the heart of the delays.

WM comment

It is hoped that corporate directors which themselves have only natural persons as their directors will be permitted, but this is yet to be confirmed.

We have written on this in more detail here.

Drag along rights: how far can you go?

A drag along clause is a provision, contained in a company’s articles of association, conferring […]

A drag along clause is a provision, contained in a company’s articles of association, conferring on the majority shareholders the right to accept an offer to buy their shares and to force the minority shareholders to accept such an offer.

In Arbuthnott v Bonnyman [1] the Court of Appeal was concerned with the insertion of drag along provisions into the company’s articles without the consent of the minority shareholder, which then resulted in the sale of the company to a third party. The amendment was made following a management buy-out offer and in the knowledge that one of the shareholders was reluctant to sell, considering the price offered to be a substantial undervaluation. The minority shareholder argued that this constituted unfair prejudice under section 994 of the Companies Act 2006.

The Court of Appeal looked at the terms of the shareholders’ agreement that the parties had previously entered into and the articles of association, as amended, together. It held, on the facts, that amendments to the articles were no more than a tidying-up exercise with no evidence of bad faith or improper motive and that the amendment to allow the sale to proceed was not inconsistent with the original arrangements entered into by the shareholders. For example, the agreement contained a provision that the minority would be bound by the price with which the majority was content. The amendments to the articles also accorded with “commercial common sense”, in particular the need to align ownership of the company with those who worked in the business and to avoid a scenario in which a majority of the shares were held by retired or retiring members.

The Court also held that a term could be implied that, as sophisticated financial professionals, the majority would not accept a price which they did not honestly consider to be fair and reasonable, something which could have significant precedential value in further cases of this type.

WM comment

The case highlights several key issues of interest on the question of amending articles:

generally, a company is free to amend its articles. However, shareholders’ powers of alteration are not completely without limit
a power to amend will be validly exercised if done so in good faith in the interests of the company.
it is for the shareholders to say what is in the interests of the company, but an alteration will not be in the interests of the company if no reasonable person would consider it to be such
the fact than an alteration adversely affects one or more minority shareholders does not, of itself, invalidate the alteration if it is otherwise made in good faith in the interests of the company
however, an alteration should not amount to oppression of the minority; it should not be unjust; and it should not be outside the scope of the power to amend
the burden of proof lies on the party alleging invalidity of an amendment.
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[1] Charterhouse Capital Ltd sub nom Geoffrey Arbuthnott v James Gordon Bonnyman & 18 others [2015] EWCA Civ 536

Limits to the “Duomatic principle”

The “Duomatic principle” (called after the case of the same name) provides that where it […]

The “Duomatic principle” (called after the case of the same name) provides that where it can be shown that all shareholders having the right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be. This can in some cases obviate the requirement to hold a general meeting to pass a resolution – so long as all the shareholders agree to that resolution.

However, it is not carte blanche to ride roughshod over the Companies Act requirements, as a recent case demonstrates.

In Henry v Finch [1] the respondents, a husband and wife, were the sole directors and shareholders of a company that had gone into liquidation and the liquidators were challenging a number of transactions the company had entered into. In particular, the Finches had removed properties from the company, crediting the corresponding mortgages to the company, via the directors’ loan account and had redeemed 875,000 shares that had been allotted to Mr Finch, crediting Mr Finch’s director’s loan account with £875,000. The liquidators attacked these transactions as a preference under section 239 of the Insolvency Act 1986 and/or an unlawful distribution under the Companies Act.

The High Court held that the removal of the properties and the redemption of the shares constituted both a preference and an unlawful distribution. The evidence showed that the company did not have sufficient net profits available for distribution rendering the transactions unlawful. In giving judgment, the Court considered that various technical breaches of the Companies Act were cured by the application of the Duomatic principle. However, the Court made clear that the principle could not apply to an unlawful distribution or to the situation where the company was insolvent or in financial difficulties such that its creditors were at risk.

The position is that if a formal members’ resolution would itself not have been valid, for example, because it is a fraud or otherwise unlawful, then the Duomatic principle will not apply. In particular, the statutory provisions governing distributions – the rationale of which is to protect creditors – are not capable of being waived under the Duomatic principle.

The position in respect of share buybacks is less clear-cut. There is authority to the effect that the statutory provisions governing a share buyback are not merely procedural and for the benefit of current members (and therefore cannot be waived under the Duomatic principle) but there is also authority to the effect that the Duomatic principle could rectify the failure to display the share buyback agreement at the company’s registered office for 15 days before a general meeting as required under the Companies Act.

WM comment: It is never good practice to rely on the Duomatic principle. Its application is limited and any consent must be unanimous and given by the shareholders in full knowledge of what they are consenting to – which may be difficult to prove. It should be regarded as a lifeboat if something has gone wrong and not as an excuse for non-compliance with company law requirements.

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[1] [2015] All ER (D) 96

Material adverse change clauses (MAC clause)

A Material Adverse Change Clause (MAC clause) is a clause that is sometimes used in […]

A Material Adverse Change Clause (MAC clause) is a clause that is sometimes used in a sale and purchase agreement where there is to be a gap between exchange and completion. The clause enables the buyer to withdraw from the deal where something happens between exchange and completion which is materially detrimental to the business they’re buying.

A recent High Court case [1] was concerned with a MAC clause in a share purchase agreement (the SPA). The clause defined a Material Adverse Event as: “an act or omission, or the occurrence of a fact, matter, event or circumstance, affecting [the target] giving rise to, or which is likely to give rise to, a material adverse effect on the business, operations, assets, liabilities, financial condition or results of operations of [the target] taken as whole”.

The SPA also contained a clause that the seller’s liability was limited by an acknowledgement of the buyer that the seller gave no warranty as to the accuracy of any forecasts, estimates, projections and statements of honestly expressed opinion provided to the buyer before the SPA was signed.

Following exchange, the target’s financial performance deteriorated – profits were 84.6 per cent down on forecasts. The target also made substantial downward adjustments to its forecasts between exchange and completion.

The buyer claimed that two events had occurred which fell within the MAC clause:

actual deterioration in the target’s financial performance in the month prior to completion
the target making substantial downwards revisions to its financial forecasts during the period between exchange and completion of the transaction.

The seller applied to strike out the buyer’s claims.

The Court held that it was arguable that the first of these was a Material Adverse Event, but not the second. The fact of revision of forecasts did not fall naturally within the words “act or omission, or the occurrence of a fact, matter, event or circumstance”. It was not the revision itself which was causative of adverse consequences, but rather what lay behind the need to make the revisions.

Further, the inclusion of revisions to forecasts within the meaning of Material Adverse Event was inconsistent with the statement in the SPA that the seller gave no warranty in respect of the accuracy of financial forecasts. To include forecasts within that definition amounted to forecasts being warranted.

WM comment

The case is a reminder that the courts will not interpret a MAC clause in isolation from the rest of the agreement and that the courts will look to the language of a particular clause as well as the commercial background when interpreting it.

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[1] Ipsos SA v Dentsu Aegis Network Limited [2015] EWHC 1726

Persons with significant control: an update

The Small Business, Enterprise and Employment Act 2015 (the Act) contains provisions to increase the […]

The Small Business, Enterprise and Employment Act 2015 (the Act) contains provisions to increase the accountability of companies, including the setting up of a central public register of people with significant control (PSC Register). From April 2016, companies will be required to keep their own PSC Register and, from June 2016, a company will need to deliver its PSC Register to Companies House at the same time as its confirmation statement (which will replace the annual return).

The Department of Business, Innovation and Skills (BIS) has published a consultation paper seeking views on the draft Register of People with Significant Control Regulations 2015 (the Draft Regulations). The main elements of the consultation which the BIS are seeking views on are summarised below:

Scope

Companies that are required to comply with Chapter 5 of the Disclosure Rules and Transparency Rules (which includes AIM companies) will be exempt from the requirement to keep a PSC Register (section 790B of the Companies Act 2006). The Draft Regulations also exempt companies with voting shares admitted to trading on a regulated market in any EEA state (which does not include AIM). The rationale is that these companies already provide substantial information about their major owners.

Recording control

A person with significant control (PSC) is defined as an individual who meets one or more of the following criteria:

direct or indirect ownership of more than 25 per cent of a company’s shares
direct or indirect control of more than 25 per cent of a company’s voting rights
direct or indirect right to appoint or remove a majority of the board of company directors
exercises or has the right to exercise significant influence or control over a company
exercises or has the right to exercise influence or control over the activities of a trust or firm which itself meets one or more of the first four conditions.

The PSC Register must record which of the conditions the PSC satisfies. The Draft Regulations also require an indication of the extent of the control and the BIS has proposed a banding system to indicate the level of the PSC’s ownership of the relevant company.

Fees

Although the PSC Register will be available at no charge, a fixed fee of £12 has been proposed which will apply to all requests for copies of entries.

Protection regime

PSCs will be able to apply to have their information on the company’s PSC register withheld from the public register or from being shared with credit reference agencies if they believe that they are at risk of violence. There will also be controls on the ability of organisations to obtain the residential addresses of PSCs.

Warning and restriction notices

If a company has knowledge of a person it believes should be on its PSC Register, they may be required to contact them under the Regulations in order to obtain the relevant details for the PSC Register. It is proposed that if the person fails to respond to an initial notice within one month, the company may issue them with a warning notice and, if they fail to comply with the warning notice within one month, subsequently, a restriction notice. The restriction notice will freeze the person’s interest in the company until the information is obtained for the PSC Register.

Points to consider

The Government left the detail out of the Act and has now set itself a tight timescale for finalising regulations, which will undoubtedly add to the burden on those companies that are not exempt from the new PSC requirements. We expect a number of concerns to have been aired during the consultation process as to the workability of the new arrangements and further developments in this area are very possible over the next few months.

Validity of buyer’s notice of claim

In Ipsos S.A. v Dentus Aegis Network Limited [2015] EWHC 1171, Ipsos S.A. (the Buyer) […]

In Ipsos S.A. v Dentus Aegis Network Limited [2015] EWHC 1171, Ipsos S.A. (the Buyer) purchased shares in the target group from Dentsu Aegis Network Limited (the Seller).

The Seller warranted that no member of the target group was facing an employee claim and that each member of the group had at all times materially complied with all applicable employment laws.

The sale and purchase agreement (SPA) contained the following provisions:

the Seller was only liable for a breach of warranty claim if the Buyer had served written notice “specifying in reasonable detail: (i) the matter which gives rise to the claim; (ii) the nature of the claim; and (iii) (so far as is reasonably practicable at the time of notification) the amount claimed in respect thereof”. A claim would also be barred if legal proceedings were not commenced within six months of notice being given (the Notice Limitation)
the Buyer had an obligation to notify the Seller of any claim it received from a third party which might result in a warranty claim. A failure to comply with this clause would not prevent a warranty claim being made, but it could be taken into account when calculating damages
a two-year limitation period on warranty claims.

Following completion, a large number of employment claims were filed against a Brazilian subsidiary of the target group by contract workers (the Employment Claims).

The Buyer issued proceedings against the Seller for breach of warranty, claiming that the target group had breached a number of Brazilian labour laws. The Seller argued that this warranty claim was barred by the Notice Limitation.

The first letter that the Buyer relied on notified the Seller of the Employment Claims, but specifically stated that it was not notice given pursuant to the Notice Limitation so as not to commence the six-month time limit to issue proceedings.

About a year later, and just before the two-year limitation period expired, the Buyer sent another letter relating to the same claims. This letter included the sums involved and gave notice of a number of further employment claims. It also requested the Seller to clarify its position in relation to the third-party claims and stated that following such confirmation the Buyer would provide a further breakdown of losses, costs and expenses “which it claims or may claim from [the Seller] for breach of warranty”.

The High Court found in favour of the Seller on the basis that:

the original letter was clear it was not notification of a warranty claim; and
the second letter:

– failed to clearly specify its purpose, the matter giving rise to the claim, and the amount being claimed (in accordance with the Notice Limitation)
– did not contain a reference to the specific clause of the SPA which contained the Notice Limitation
– did not allege a breach of Brazilian labour law, which was the essence of the Buyer’s complaint
– did not specify the nature of the complaint.

The judge rejected the Buyer’s argument that the timing of the second letter, shortly before the limitation period expired, should have suggested to the reasonable reader that it was to be understood as notice of a warranty claim.

WM comment

Take particular care when drafting notice of a breach of warranty. It is essential to accurately comply with the provisions in an SPA which govern the conduct of warranty claims. The courts will apply and interpret these clauses strictly.

There are four general principles that the courts will apply when deciding if a notice is valid:

Commercial purpose: does it ensure the seller has sufficient knowledge of the claim to allow it to make financial provision? This is not met if the notice is uninformative or unclear. [1]
Would the notice be understood by a reasonable recipient with knowledge of the context in which it was sent? [2]
Is it clear, from the notice, that a claim is actually being made, rather than indicating the possibility that a claim may be made? [3]. The courts may cross-refer to previous correspondence here.
If there were any requirements specified in the SPA, have these been met?

A notice of a claim should state which provision of the SPA it relates to.

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[1] Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep 423
[2] Laminates Acquisitions v BTR Australia Limited [2003] EWHC 2540 (Comm)
[3] ibid

When do the changes to UK company law come into effect?

The Small Business, Enterprise and Employment Act 2015 has received Royal Assent. The commencement date […]

The Small Business, Enterprise and Employment Act 2015 has received Royal Assent. The commencement date of its company law provisions is staggered. This article explains what comes into force when.

26 May 2015

Prohibition on the issue of new bearer shares.

Application of directors’ general duties to shadow directors.

10 October 2015

Reduction in notice periods for striking off companies

Suppression of the day of a director’s date of birth from the public register of directors.

December 2015

New process to challenge an inaccurate registered office address.

25 February 2016

The deadline for the voluntary surrender of bearer shares for their conversion into registered shares.

April 2016

Requirement for companies and LLPs to maintain a PSC (persons with significant control) register.

June 2016

Abolition of the requirement to file an annual return, to be replaced by an annual confirmation detailing only those changes since the last confirmation statement.

Simplification of statements of capital.

Obligation to file the PSC register at Companies House.

Option for private companies (with shareholder approval) to keep information on the public register rather than maintaining their own registers (e.g. the registers of members and directors, and the new PSC register).

Obligation on large companies to report on their payment practices and policies.

October 2016

Prohibition on corporate directors. Further details, in particular the scope of the prohibition, are awaited. There will be a 12-month transitional period for existing corporate directors.

31 May 2017

Latest date for the introduction of new streamlined company registration procedure.

WM comment

The prohibition on corporate directors and the requirement to maintain a PSC register are the two most important changes introduced by the Act. Click here and here for our previous articles on these topics.

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