Sep 11, 2015 - first half of 2015 (based on the ongoing deal reports produced by our Market Tracker ..... published resp
LexisNexis Corporate
A LexisNexis mini-mag helping corporate lawyers stay up to date Autumn 2015
Lexis®PSL Corporate News updates, case & news analysis and dates for the diary Trends in UK Public M&A in H1 2015 Market Tracker Trend Report Lexis®PSL Practice Note: Voting at listed public companies: procedure, trends and developments Women on Boards— Mid-year update 2015 Market Tracker Trend Report
From the Editor Welcome to our LexisNexis Corporate mini magazine, which includes a selection of content for corporate lawyers from LexisPSL Corporate, Market Tracker and other LexisNexis publications. From LexisPSL Corporate, which provides practical guidance for corporate lawyers, we have selected a number of news updates from summer 2015, two recent news analysis pieces, a case analysis, a Practice Note on the procedure, trends and latest developments for voting at UK-listed companies, two Q&As on distributions and partnerships, and a reminder of the table of commencements for the Small Business, Enterprise and Employment Act 2015. Also included are extracts from two trend reports produced as part of our unique Market Tracker service. The first is our latest public M&A report, analysing trends in deals announced in the first half of 2015 (based on the ongoing deal reports produced by our Market Tracker team). The second trend report looks at the progress made by FTSE 350 companies in meeting the recommendations of the 2011 Davies Report titled ‘Women on Boards’, as at mid-year 2015 ahead of the impending deadline of the end of the year for meeting targets. Our magazine also includes content from other LexisNexis publications and services, including an article from the fortnightly journal Company Secretary’s Review on incorrectly registered winding up petitions, and, finally, information on LexisDraft, the Microsoft Word toolbar which checks for problems with definitions, references, numbering, citations. We hope that you enjoy the magazine. Best wishes, The LexisPSL Corporate Team
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Editorial Editor: James Hayden Production Editor: Rachel Buchanan Design: LexisNexis Creative Solutions Offices: Lexis House, 30 Farringdon Street, London, EC4A 4HH Tel: 020 7400 2500 Reproduction, copying or extracting by any means of the whole or part of this publication must not be undertaken without the written permission of the publishers. This publication is intended to be a general guide and cannot be a substitute for professional advice. Neither the authors nor the publisher accept any responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this publication.
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Corporate topics include Company incorporation, Corporate governance, Share capital, Private M&A, Public company takeovers, Equity capital markets and Private equity
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Trends in UK public M&A deals in H1 2015
Market Tracker
This is an extract from our recent Market Tracker Trend Report, which provides an insight into the current dynamics of public M&A activity within the UK and considers what we can expect to see in the six months ahead. Find more Market Tracker Trend Reports and sign up to receive them free by email at lexisnexis.co.uk/CorpMag15/TrendReports Executive summary Deal flow increased in the first half of 2015, with 5% more firm offers announced than the same period in 2014. Even more significantly, aggregate deal values were 587% higher than in the first half of 2014. These are clear signs that the UK public M&A market remains buoyant and this positive momentum is expected to continue into the second half of the year. The first half of 2015 saw a continuance of a number of trends observed in recent years, amongst them the continued preference for schemes of arrangement on larger deals, the popularity of cash consideration, an increase in use of the formal sale process, a predominance of non-UK bidders and market flex dispensations. Following the recent prohibition on the use of cancellation schemes of arrangement on deals announced after 4 March 2015 bidders must now choose between a transfer scheme of arrangement or a contractual offer structure. Since 4 March 2015, 15 firm offers were announced, of which 10 were structured as transfer schemes and 5 as contractual offers; indicating that despite the prohibition on cancellation schemes, schemes of arrangement remain as bidders’ preferred choice of deal structure. Continuing the trend from last year we have also seen strong interest in the technology, media & telecommunications (TMT) sector, an increase in the use of co-operation agreements and green shoots of recovery in private equity backed bidder activity. While cash remains king in the present market, we have seen increased uptake in deals financed entirely with third-party debt and other forms of consideration including loan notes and a combination of cash and shares. Bidders appear to be more willing to use third-party debt (wholly or in part) to finance the acquisition.
Deal structure Firm offers in H1 2015: Structure by number of deals (23 transactions)
39% 61% 39%
cheme of S arrangement Offer
Structuring the deal to suit the circumstances Schemes of arrangement remain the deal structure of choice among bidders: of the 23 firm offers announced in the first half of 2015 (12 for Main Market companies, 11 for AIM), 14 were by way of scheme and 9 structured by way of an offer. In the first half of 2015, as in the equivalent period in 2014, a scheme was more often agreed where the deal was larger in size. 8 of the 10 largest deals firmly announced in the first half of the year were structured as schemes. The 2 deals structured as offers involved foreign bidders operating in the financial services industry.
“Expectations are high that 2015 will be a record year for public M&A – that 2015 will be the new 2007. We need to temper our excitement on this front – whilst the value of deals has certainly rocketed the volume of deals has not increased significantly.” Selina Sagayam, Partner, Gibson Dunn
“We have continued to see an increase in takeover activity during the first half of 2015 with a particular focus on the energy sector.” Rebecca Gordon, Partner, Dentons
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Deal value
H1 2015 v H1 2014: Deal values
The aggregate value of deals firmly announced in the first half of 2015 was £60.38 billion, up 587% compared with the same period in 2014 (£8.79 billion). UK public M&A activity is reaching new highs and the stream of high value deals is expected to continue into the second half of the year.
60.38
50 Deal value (£ billions)
It should be noted that the offer for BG Group plc accounted for 78% of the total value of deals announced in the first half of 2015; excluding this deal, the total deal value for the period was £13.38 billion (a 52% increase on the first half of 2014).
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Market Tracker
The oil & gas industry saw the highest value deal: the £47 billion cash and share offer for BG Group plc by Royal Dutch Shell plc. The offer for Beale plc by Mr Andrew Perloff, valued at £1.23 million, was the lowest.
70
40
30
20
Of the 23 firm offers announced in the first half of 2015, 7 (30%) had a deal value of over £1 billion, compared to only 3 (14%) (based on 22 firm offers announced in 2014). The average deal value was £2.63 billion (H1 2014: £399 million) and the median deal value was £111.9 million (H1 2014: £53.63 million).
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8.79 0
H1 2015
H1 2014
International bidders
Country of incorporation of bidder*
Number of bidders**
Total deal value (approx.)
United States
6
£8.48 billion
Spain
1
£1.7 billion
Japan
2
£1.29 billion
Canada
1
£1.22 billion
Luxembourg
2
£132.4 million
British Virgin Islands
1
£98.8 million
Bahamas
1
£43.8 million
Philippines
1
£7.11 million
* Where a bid vehicle was used, this table refers to the country of incorporation of the ultimate bidder. ** T his table includes all firm offers made by non-UK bidders that were analysed (whether they completed or remained ongoing as at 30 June 2015).
“We expect to see much more activity from the US – M&A in the US is at record level highs and in-bound US M&A generally saw a significant increase in the first part of this year. There has also been heightened interest from Asian bidders (particularly from Japan).” Selina Sagayam, Partner, Gibson Dunn
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Industry focus
Market Tracker
The majority (47%) of bidder activity seen in the first half of 2015 occurred in technology, media & telecommunication and financial services industries. The TMT industry saw the highest deal volume, 57% of which involved foreign bidders (also operating within this industry) using the UK public M&A market to consolidate their global position.
in the TMT industry also grew during the first half of 2015, with sizable deals including BT Group plc’s £12.5 billion acquisition of mobile telecommunications operator EE. Further bidder activity in the private and public M&A spheres is expected in 2015. Activity in the mining, metals & extraction industry was solely conducted by private equity backed bidders, indicating that these bidders are capitalising on (generally) depressed commodity prices and are increasingly seeing value in the industry – unlike the comparable period in 2014 when P2P activity was not concentrated within a specific industry.
There has been a global surge in the TMT industry. In the US, March 2015 saw the $77 billion acquisition of Broadcom Corporation by Singapore-incorporated Avago Technologies, followed 2 months later by the $78.7 billion acquisition of Time Warner Cable by Charter Communications. Private M&A activity
H1 2015: Firm offers by industry type Technology, media & telecommunications Financial services Retail & wholesale trade Professional services Oil, gas & chemicals Mining, metals & extraction Engineering & manufacturing Travel, hospitality, leisure & tourism Healthcare 0
1
2
3
4
5
6
7
8
“The hot sector of course is TMT and although the anti-trust (domestic and EU) regulators are ‘all over’ these deals, the sector should see a strong second half of the year. Surprisingly, we saw a dip in pharma deals this year – a sharp contrast to the highs of 2014 – we expect this to be a temporary retreat following some of the major mishaps of 2014 (whether tax inversion driven or otherwise).” Selina Sagayam, Partner, Gibson Dunn
Target response: recommended or hostile? No hostile bids were announced during the first half of 2015, unlike the same period in 2014 which saw 2 hostile bids announced. Of the 23 firm offers, 19 (82%) began with a recommendation and remained recommended as at
30 June 2015. A recommendation had a significant influence on a bid’s ultimate success. All recommended offers had either completed or were still in progress at 30 June 2015.
“We are seeing more interloper/competitive activity in the US and predictions are that H2 for the UK may also see a similar change in landscape.” Selina Sagayam, Partner, Gibson Dunn
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Competing and potential competing bids There were no instances of actual competing bids and only one potential competing bid scenario in the first half of 2015. This is broadly comparable with the same period in 2014 and indicates that the competitive tension in the UK public M&A market remains weak. Record-high deal values seen in the first half of 2015 may potentially be triggering bidder concerns that targets are becoming overvalued, discouraging them from
entering into competitive bid scenarios which may cause them to have to pay more for the target as a result. However, with the resurgence in public M&A activity during the first half of 2015, we may see a number of competing and potential competing bid situations arise.
Market Tracker
“The put up or shut up period can still act as a deterrent to bidders particularly in competitive scenarios where financing is required.” Rebecca Gordon, Partner, Dentons
Nature of consideration Cash only consideration was less frequently used by bidders in the first half of 2015 but continues as the most popular consideration structure. There was also a fall in share only consideration being offered. However these decreases were offset by a 17% rise in the usage of a combination of cash and
shares in the first half of the year. This indicates that, with the FTSE 100 breaking record highs in March 2015 and the growing strength of other major indices, bidders are increasingly confident of offering shares as a form of consideration along with cash.
Firm offers in H1 2015 & H1 2014*: Nature of consideration
H1 2015
77%
61%
H1 2014
*Based on a total of 23 firm offers announced in H1 2015, 22 in H1 2014. **Figure for H1 2015 includes offer for Domino Printing Sciences plc by Brother Industries, Ltd. where a loan note alternative was offered.
26%
9%
9%
9% 5%
4% 0% Cash only
Shares only
Combination of cash and shares
Cash and unlisted securities alternative
0% Cash and loan notes**
“A choice of consideration can be attractive to shareholders who do not want to realise an immediate cash gain. However the prospectus requirements for mix and match facilities can be onerous.” Rebecca Gordon, Partner, Dentons
To find out more visit Lexisnexis.co.uk/CorporateMag15/Blog
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News headlines LexisPSL Corporate publishes daily updates on the news that is relevant to corporate lawyers, as it happens. Here are some of this summer’s highlights.
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Public company takeovers Takeover Panel consults on voting rights and acting in concert Two public consultation papers were issued by the Code Committee of the Takeover Panel on 14 July 2015. Consultation paper PCP 2015/2 proposes the amendment of the definition of ‘voting rights’ to cover shareholders restricted from exercising voting rights and to remove the ability to issue suspended voting shares as a means of avoiding the normal application of Rule 9. Consultation paper PCP 2015/3 proposes additional presumptions to the definition of ‘acting in concert’ so that the position is clearer. The deadline for both consultations is 11 September 2015. Stamp duty and SDRT guidance on transfer schemes HMRC has issued guidance on the amending regulations that took effect from 4 March 2015 to prevent target companies in takeovers using share cancellation schemes of arrangement. Recognising that transfer schemes are likely to become more prevalent, HMRC has provided some practical guidance on the process for submitting documentation for stamping. Company ongoing obligations Government consults on closing gender pay gap On 14 July 2015, the Government Equalities Office published a consultation on closing the gender pay gap, as required by section 147 of the Small Business, Enterprise and Employment Act 2015. The consultation document highlights recent figures which demonstrate that FTSE 100 companies have achieved their target of 25% female board representation, as set in Lord Davies’ 2011 report. A key proposal is that companies with more than 250 employees should be required to publish the differences between the average pay of their male and female employees. The consultation is in the form of an online response form and is open until 6 September 2015. Corporate governance ESMA publishes responses to proxy advisor code of conduct consultation The European Securities and Markets Authority (ESMA) has published responses to its consultation on the impact of the Best Practice Principles for Providers of Shareholder Voting Research and Analysis (BPP). The consultation ran from 9 June to 27 July 2015. ESMA is currently reviewing the development of the BPP and requested views on how stakeholders perceive the most recent proxy seasons (after the BPP was established), in order to assess the extent to which new trends or changes in proxy advisors’ approaches have developed. Partnerships Changes proposed to UK limited partnership law HM Treasury is consulting on amendments to the Limited Partnerships Act 1907, as part of its Investment Management Strategy, in order to support the effective use of limited partnerships for private equity investments. The proposed 8
amendments cover a broad range of issues relating to limited partnerships, and will apply to a UK limited partnership that is a ‘collective investment scheme’ under section 235 of the Financial Services and Markets Act 2000 but is not a scheme authorised by the Financial Conduct Authority. The deadline for the consultation is 5 October 2015. Audit and auditors Proposed changes to audit and auditor regulation On 20 July 2015, a House of Commons ministerial statement was released proposing changes that will require all public interest entities, including listed companies, banks, building societies and relevant insurers to put their audit out to tender at least every ten years and to change their auditor at least every 20 years. The government will publish a more detailed consultation in the coming months. Accounts and reports New FRC accounting standards issued On 16 July 2015, the Financial Reporting Council (FRC) published a suite of changes that will update and simplify UK and Ireland accounting standards, in particular implementing new requirements for micro-entities and small entities. The changes include amendments to FRS 100, FRS 101 and to FRS 102 and the issuing of a new standard, FRS 105, applicable to micro-entities. The Financial Reporting Standard for Smaller Entities (FRSSE) has been withdrawn. Equity capital markets ESMA publishes final report and RTS on prospectuses under the Omnibus II Directive On 1 July 2015, the European Securities and Markets Authority (ESMA) published the final report and draft regulatory technical standards (RTS) on procedures for the approval of prospectuses, incorporation by ref-erence of information, publication of prospectuses and dissemination of advertisements relating to offers to the public and admission to trading under the Omnibus II Directive. The European Commission has three months from 1 July 2015 to decide whether to endorse ESMA’s draft RTS. Accountability and Transparency Companies House free search service All public digital data held on the UK register of companies is now accessible free of charge on the new Companies House public beta search service. The service provides access to more than 170m digital rec-ords on companies and directors, including financial accounts, company filings and details on directors and secretaries throughout the life of the company.
Dates for the diary Here we set out the key legal developments that are expected over the coming months 5 October 2015 Partnerships
Deadline for comments on HM Treasury’s draft Transparency Regulations 2015 amending FSMA 2000 to implement Transparency Directive Amending Directive 2013/50/EU of the European Parliament and the Council dated 22 October 2013 (TDAD).
Deadline for HM Treasury consultation on proposed amendments to the Limited Partnerships Act 1907. October 2015 Equity capital markets—Transparency Directive
Deadline for responses to government consultation on closing gender pay gap.
Expected publication of a FCA policy statement to CP15/11 on the implementation of Directive 2013/50/EU of the European Parliament and the Council dated 22 October 2013 (Amending Directive). (See 26 November 2015.)
11 September 2015 Takeovers
October 2015 Small Business, Enterprise and Employment Act 2015
Deadline for responses to Takeover Panel’s consultations on proposed amendments to the definition of ‘voting rights’ and new presumptions to the definition of ‘acting in concert’.
Provisions concerning the following subjects are expected to come into force:
6 September 2015 Corporate governance
30 September 2015 Market Abuse Regulation (MAR)—ESMA’s draft RTS Extended date by which ESMA is required to finalise and submit draft regulatory technical standards (RTS) in respect of certain provisions of MAR to the European Commission. September 2015 Corporate governance Update of the OECD Principles of Corporate Governance (Principles of Corporate Governance). September 2015 Accounting Financial Reporting Council (FRC) is expected to issue revised editions of FRS 100, FRS 101 and FRS 102 applicable in the UK and Republic of Ireland following the changes published in July 2015 and other changes since they were published (see entry at 1 January 2016 below). 1 October 2015 Contingent Convertible Instruments
Date on which permanent rules restricting the distribution of CoCos to retail investors are expected to come into force and the temporary rules lapse. 1 October 2015 Omnibus II Directive—ESMA Date by which the European Commission has to decide whether to endorse ESMA’s draft RTS on prospectusrelated issues under the Omnibus II Directive. October 2015 Market Abuse Regulation (MAR)—FCA Handbook Expected publication of a FCA consultation paper on amendments to the FCA Handbook following the introduction of MAR.
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4 September 2015 Equity capital markets—Transparency Directive
• the prohibition on corporate directors (SBEEA 2015, ss 87–88) • reduction of the time periods applicable to the company strike off process (SBEEA 2015, s 103) • suppression of directors’ dates of birth from the public register (SBEEA 2015, s 96) 26 November 2015 Transparency Directive Final date for implementation of Directive 2013/50/EU of the European Parliament and the Council dated 22 October 2013 in the United Kingdom (Amending Directive). 31 December 2015 Corporate governance Anticipated date for female representation on FTSE 100 boards to reach a minimum of 25%. 1 January 2016 (or earlier) Accounting FRC’s amended final UK and Irish accounting standards are effective for accounting periods beginning on or after 1 January 2016 (or earlier). 1 January 2016 Omnibus II Directive Last date by which Omnibus II Directive (2014/51/EU) must be implemented under national law. January 2016 Small Business, Enterprise and Employment Act 2015 The requirement for companies to keep a PSC register (SBEEA 2015, ss 81–83, Sch 3) is expected to come into force
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News analysis As part of its news service, LexisPSL Corporate provides in-depth analysis of the key developments in the world of corporate law. We give a recent example of our analysis here. European Parliament proposes new amendments to Shareholder Rights Directive The European Parliament (EP) has approved wording in proposed amendments to the Shareholder Rights Directive (2007/36/EC). The amendments seek to improve transparency while ensuring that shareholders have a long-term commitment to companies. What is the background to this amendment? In April 2014, the European Commission presented a series of measures designed to improve corporate governance of companies listed on European stock exchanges with a proposal for the revision of the Shareholder Rights Directive, a recommendation on corporate governance reporting and a proposal for a Directive on single-member private limited liability companies. What are the new proposals? The EP has inserted a requirement for large undertakings to publish information country-by-country, on profits or losses
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before tax, taxes on profits or losses and public subsidies received. Public interest entities, including listed companies and insurance firms, as well as companies designated by member states as public-interest entities because of their significant public relevance, should also be required to do so. The EP has also proposed rules to enable shareholders to vote at least every three years on a listed company’s remuneration policy for directors. However, it says member states should be allowed to decide whether the vote on remuneration policy by the general meeting of shareholders is binding or advisory. The company’s policy on directors’ pay should explain how it contributes to the long-term interest of the company and set clear criteria for awarding fixed and variable remuneration, including all bonuses and benefits. These proposals on remuneration are broadly similar to the current regime in the UK relating to remuneration policy, but the EP has also proposed that the value of shares should not play a dominant role in the financial performance criteria and
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that share-based remuneration should not represent the most significant part of directors’ variable remuneration. What are the next steps? The text, as amended by Parliament, was approved by 556 votes to 67, with 80 abstentions. MEPs decided not to close the first reading, but instead to enter into informal talks with member states with a view to seeking agreement on the final version of the legislation.
with regard to the procedure and system failures at ARM, that led to this fine, provide for listed companies and their advisers with respect to implementing related party transaction policies? Does it give further, specific meaning to the general statement of LP 2 that listed companies ‘must take reasonable steps to establish and maintain adequate procedures, systems and controls to ensure it complies with its obligations’? The FCA concluded that ARM:
Related party transaction failures What guidance does the FCA’s action in fining Asia Resource Minerals plc (ARM), formely Bumi plc, £4.65m provide on the procedures, systems and controls required to comply with listed company obligations? Which rule breaches did the FCA identify? The FCA found that ARM had committed ‘serious breaches’ of Listing Principle 2 (LP 2), Listing Rule 8 (LR 8), Listing Rule 11 (LR 11) and Disclosure and Transparency Rule 4 (DTR 4) in the period 28 June 2011 to 19 July 2013. ARM agreed to settle the matter at an early stage in the FCA’s investigation and thereby qualified for a 30% reduction in the penalty payable (which would otherwise have been £6,644,641). The FCA’s actions are especially noteworthy because it is only the second final notice issued in relation to a listed company’s failure to comply with the Listing Rules relating to related party transactions (RPTs). The first was issued on 26 April 2012 to Exillon Energy plc. What guidance does the FCA’s statements
• breached LP 2 by failing to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations • breached LR 11 in respect of its treatment of RPTs (not providing confirmation from its sponsor that the proposed transaction was ‘fair and reasonable as far as the shareholders of the company are concerned’ before entering into certain transactions) and failing to aggregate such transactions • breached LR 8 with regard to the need to consult a sponsor when proposing to enter a transaction that is, or may be, a RPT, and • breached DTR 4 by failing to publish its annual financial report at the latest four months after the end of its 2012 financial year Which failings did the FCA identify which led to a finding that ARM breached the Listing Principles? In addition to the specific breaches of the Listing Rules and Disclosure and Transparency Rules, the FCA found that ARM 11
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breached LP 2 and the FCA’s description of the failings leading to breach of LP 2 (and ultimately LR 11, LR 8 and DTR 4) are at the heart of its Final Notice. The Listing Principles are a general statement of the fundamental obligations of every company with a listing of its equity shares on the Official List of the FCA, with the aim of ensuring ‘adherence to the spirit as well as the letter’ of the LRs, DTRs and the corporate governance rules. The FCA also state that: ‘While cases may be brought in conjunction with action for a breach of a specific rule or rules, we are prepared to take enforcement action on the basis of the Principles alone, taking account of the standard of conduct required by the Principle in question.’ The FCA found that ARM had acted in contravention of LP 2 (as in force at the time of the breach, LP 2 now being renumbered as LP 1), which states that ‘A listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations’. The FCA provide guidance (LR 7.2.2G) ‘that listed companies should place particular emphasis on ensuring that they have adequate procedures, systems and controls in relation to: • identifying whether any obligations arise under LR 10 (Significant transactions) and LR 11 (Related party transactions); and • the timely and accurate disclosure of information to the market.’ In the absence of further guidance from the FCA with regard to interpreting LP 2, the FCA’s statements in its enforcement action against ARM, as outlined below, therefore have broader significance to the market in terms of outlining the failures that constitute breach of LP 2. Management of increased risk of occurrence of related party transactions The FCA point out that ARM ‘should have been aware from the outset of the heightened risk of RPTs taking place’ given the number of potentially connected parties among the founding shareholders, their Indonesian operations and subsidiaries, the number of directors with senior management or board positions in other companies in the same industry and other operations and financial interests in Indonesia, as well as ‘past concerns’ regarding RPTs: ‘It should, therefore, have been understood at a senior level within the Company that the composition and nature of the group created a high risk of RPTs. This being the case, the Company should have paid especially close attention to ensuring that it took reasonable steps to establish and implement an effective RPT Policy including at Subsidiary level.’ Management oversight and control The examples given by the FCA of ARM’s failures ‘to establish
adequate management oversight and control’ over its Indonesian subsidiary include: • a delay of five months in attaining representation on the subsidiary’s board • overreliance on senior management to implement the RPT policy, and • insufficient monitoring by ARM to ensure that the RPT policy was being implemented at the subsidiary Implementation of RPT policy The FCA describe ARM’s implementation of an RPT policy as ‘inadequate’. Highlighted failures included: • ‘inadequate training’, in particular the failure to compel senior management of its subsidiary to attend training sessions and the failure to ensure that senior individuals who were in a position to identify potential RPTs had the requisite knowledge and understanding of their obligations • the delay in communicating the RPT policy to the subsidiary until four months after listing, with the result that it wasn’t adopted by the subsidiary until five months after listing • the delay in communicating the RPT policy to the subsidiary until four months after listing, with the result that it wasn’t adopted by the subsidiary until five months after listing • the failure to maintain an accurate list of related parties, together with delays in updating the list • the delay in appointing an in-house internal audit function until 18 months after listing • the ineffectiveness of the conflicts committee allocated responsibility for the RPT policy, within which there was no clear allocation of responsibility or accountability in relation to consulting a sponsor on the application of the Listing Rules and Disclosure and Transparency Rules • the lack of a process to review and monitor the financial and transactional information provided by the subsidiary in relation to RPTs, and • the subsidiary’s failure to provide financial and transactional information to ARM and its external advisers Summary of failings The FCA conclude that: ‘all of the factors above demonstrate a serious failure...to take reasonable steps to establish and maintain adequate appropriate procedures, systems and controls in breach of LP 2. It is not sufficient to have well-drafted policies and committees with detailed terms of reference at a holding company level when those policies are not effectively communicated, implemented and monitored at subsidiary level, where the underlying business of the group is conducted.’ A ‘number of red flags’ should have put the company on notice that its RPT policy was not being implemented effectively.
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Small Business, Enterprise and Employment Act 2015 commencement table
Date 26 May 2015 (two months following SBEEA 2015’s Royal Assent)
October 2015
December 2015
26 February 2016 April 2016 June 2016
October 2016 late 2016 / early 2017
31 May 2017
Provision coming into force
SBEEA 2015 section number
The prohibition on issuing new bearer shares
SBEEA 2015, ss 84-86
The nine month period for companies to surrender and exchange their existing bearer shares begins
SBEEA 2015, ss 84-86
The provisions requiring the Secretary of State to introduce a streamlined company registration procedure by 31 May 2017
SBEEA 2015, ss 15-16
The application of the statutory duties to shadow directors
SBEEA 2015, ss 89-91
The provisions allowing regulations to be made to provide a process for changing an inaccurate and unauthorised registered office address
SBEEA 2015, s 99
Reduction of the time periods applicable to the company strike off process
SBEEA 2015, s 103
Suppression of directors’ dates of birth from the public register
SBEEA 2015, s 96
Replacement of the ‘consent to act’ procedure for newly appointed directors and secretaries
SBEEA 2015, s 100
Simplified method for removing the details of falsely appointed directors from the register (including appointed but not consenting to act)
SBEEA 2015, ss 101-102
The process of changing an unauthorised registered office address will be available (in accordance with yet to be published regulations)
SBEEA 2015, s 99
The nine month period for companies to surrender and exchange their existing bearer shares ends
SBEEA 2015, ss 84-86
The requirement for companies to keep a PSC register
SBEEA 2015, ss 81-83, Sch 3
Simplification of the statement of capital
SBEEA 2015, s 97
The new confirmation statement replaces the annual return
SBEEA 2015, s 92
The obligation to file PSC information register at Companies House
SBEEA 2015, ss 81-83, Sch 3
The option for private companies to keep information on the public register rather than keeping their own registers
SBEEA 2015, s 94, Sch 5
Update and strengthening of the regime for the disqualification of directors
SBEEA 2015, ss 104-116
The prohibition on corporate directors
SBEEA 2015, ss 87-88
A company will be able to deliver certain categories of optional information to Companies House (in accordance with yet to be published regulations)
SBEEA 2015, s 95
A new streamlined company registration procedure must be introduced by 31 May 2017
SBEEA 2015, ss 15-16 13
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Several commencement dates relating to the company law reforms have now been confirmed in The Small Business, Enterprise and Employment Act 2015 (SBEEA 2015). A number of commencement dates have not been specified in the SBEEA 2015, but the government has announced provisional implementation dates.
LexisPSL
Case analysis: ‘Material Adverse Effect’ provisions in a share purchase agreement Case reports relevant to corporate practitioners are regularly published by LexisPSL Corporate and , if a case will have real implications for corporate lawyers, we will highlight these through analysis. We give a recent example of our analysis here. Ipsos S.A. v Dentsu Aegis Network Ltd (previously Aegis Group plc) [2015] EWHC 1726 (Comm), [2015] All ER (D) 234 (Jun) What factors will the court look at in assessing whether revisions to financial forecasts fall within a definition of material adverse effect (MAE)? What is the background to this case? This case is the latest action arising from the acquisition by Ipsos S.A (the Buyer) of Synovate (the Target) from Dentsu Aegis Network Limited, formerly Aegis Group plc (the Seller), for a purchase price of £528.8m, pursuant to a share purchase agreement dated 26 July 2011 (the SPA). The transaction completed on 12 October 2011 (completion being conditional because of Seller shareholder approval requirements and certain anti-trust and competition clearances). The purchase price was based on the application of a multiplier of ten to the forecast underlying profit for the Target for 2011. In a recent action, a warranty claim by the Buyer was struck out because it had failed to comply with the claim notice provisions in the SPA.
• revised F3 forecasts produced in September 2011, which forecast a substantially reduced operating profit for 2011, and • full month flash results produced at the beginning of October 2011, which also disclosed sales and revenues materially behind the forecasts The Buyer alleged that the Seller’s continuing representations (that the RF2 forecasts provided in August 2011 and September 2011 remained the best forecasts of likely 2011 financial performance) were false since these forecasts did not remain the Seller’s best estimates and therefore there did not remain reasonable grounds for the forecasts. The Buyer further contended that the occurrence of a material adverse effect was reflected in the actual full-year profits being only £20.866m, a reduction of £31m from the RF2 forecast profit. The matter before the court is an application by the Seller to strike out the Buyer’s particulars of claim or for summary judgment, which therefore presents the opportunity to consider the merits of the Buyer’s arguments in relation to MAE provisions. Why is this case interesting for corporate lawyers?
The applications before the court turned on the construction of MAE provisions in the SPA (the occurrence of a MAE being a condition to completion in respect of the period between exchange and the expected completion date of 30 September 2011).
The inclusion and negotiation of MAE provisions in any share or asset purchase agreement (where there is split exchange and completion) may be a point of significant contention and difficulty, given the potential for the invocation of such provisions (as conditions to completion) to:
The Buyer issued proceedings against the Seller claiming damages:
• unravel the transaction (prior to completion), or • form the basis for a buyer to take legal action against the seller (after completion) for misrepresentation or breach of contract which prevent a buyer from invoking MAE provisions (as in this case) Corporate lawyers drafting share or asset purchase agreements to include MAE provisions therefore need to consider very carefully how they would be interpreted and applied by the court in different scenarios. The judgment in this case gives some guidance in this respect, especially where the use and interpretation of financial forecasts are at the heart of the dispute.
• for loss it said resulted from fraudulent misrepresentations made by the Seller in respect of forecasts concerning the Target’s financial performance, on which the Buyer relied, and • for breach of contract (based on standard provisions in the SPA requiring the Seller to notify the Buyer of matters which were reasonably likely to give rise to an ability for the Buyer to rely on the occurrence of a MAE) The Buyer alleged a loss of between £134m and £232m, on the basis that had it known the full picture as to the Target’s performance (which was withheld from it by the Seller), it would have invoked the MAE provisions and either not completed the transaction or completed at a different contractual price. Specifically, the Buyer pointed to the following forecasts which were withheld from it: • mid-month flash results produced in September 2011, which disclosed sales and revenues behind forecasts
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What are the key issues coming out of the case? The core question which the court had to consider was whether the fact that forecasts concerning the Target were materially revised downwards and/or information was received which indicated that those forecasts would need to be materially revised downwards, fall within the definition of MAE in the SPA.
LexisPSL
MAE was defined in the SPA as follows: ‘Material Adverse Effect’ means an act or omission, or the occurrence of a fact, matter, event or circumstance, affecting the Sapphire Group 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 Sapphire Group taken as a whole, but excluding any of the foregoing…’ [there followed a detailed list, including matters occurring prior to signing, those attributable to change of market conditions, law, seasonal fluctuation etc] The court found that: • the revision of the forecasts ‘did not fall naturally’ within the first part of the definition of MAE in the SPA (ie ‘an act or omission or the occurrence of a fact, matter, event or circumstance’)—the court agreed with the Seller’s submission that the MAE definition wording was deliberately narrower than the Seller’s warranty concerning MAE (‘there has been no material adverse change in the financial or trading position of [the Target] taken as a whole’) • the fact that the forecasts were revised was insufficient to meet the second part of the definition of MAE in the SPA, namely that it must have a causal effect ‘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’—the court commented that ‘It is obviously true to say that things may follow from the revision of the forecast, but this has to do with what underlies the revision, rather than the fact of the revision itself’ • it did not make ‘commercial sense’ to find that revised forecasts constitute MAE (as per the Buyer’s claim), because doing so ‘results in substance to a warranty in respect of the forecasts given after the Signing Date’—in doing so, the court noted that the SPA explicitly provided that the Seller did not provide a warranty as to preexchange forecasts, but rather the SPA’s limitations on liability schedule contains a provision that: ‘[the Buyer]
acknowledges and agrees [the Seller] does not give or make any warranty as to the accuracy of forecasts, estimates, projections, statements of intent and statements of honestly expressed opinion provided to [the Seller] on or prior to the Signing Date’ • including forecasts within the definition of MAE would ‘be productive of uncertainty, which is highly undesirable in the M&A market’ For the reasons described above, the court did not consider that revisions to the forecasts fell within the definition of MAE in the SPA. The court’s reasoning provides useful drafting and interpretation guidance, based as it is on a fairly standard definition of MAE and other warranty/limitation provisions. What is particularly interesting is the court’s willingness to look beyond strict interpretation of the drafting of the MAE definition to: • recognise that permitting revisions to forecasts to fall within the definition of MAE would in effect provide the Buyer with a warranty concerning revisions of forecasts between exchange and completion (ie, a warranty ‘in substance’ if not ‘in form’), and • take into account the parties’ intentions in the warranties and limitations provisions (viewed together) and recognise the relevance of the fact that the parties did not make provision for any warranties concerning forecasts and, further, explicitly excluded the giving of any such warranty in the limitations schedule What was the outcome of the case? The court granted the Seller the relief it sought to strike out the Buyer’s pleading that the revised forecasts fell within the SPA’s definition of MAE. The court dealt separately with the matter of whether the Buyer’s pleading that the Target’s actual performance in September 2011 fell within the SPA’s definition of MAE should be struck out. It found that the Buyer had an arguable case and therefore could not be ruled on at this stage. 15
Women on boards—Mid-year update 2015
Market Tracker
This is an extract from our recent Market Tracker Trend Report, which gives an update on the progress of companies in the FTSE 350 on appointing women to board positions as they reach the deadline for reaching targets under the 2011 Davies Recommendations. We have used the data from our mid-year update to assess how likely it is that companies will achieve their targets and to identify the issues that are most in need of attention and improvement. We have also looked beyond 2015 and considered the importance of sustainability and the ways to further improve boardroom diversity. Finally, we have summarised the key aspects of proposed EU legislation which, if implemented, would go against the UK’s voluntary,
business-led approach by setting quotas to address gender imbalance on boards. Find more Market Tracker Trend Reports and sign up to receive them free by email at lexisnexis.co.uk/CorpPMag15/TrendReports Lord Davies’ 2011 report, Women on Boards, made a number of recommendations on how to address the imbalance of gender diversity in the boardroom:
The 2011 Davies recommendations – a reminder Recommendation
Status
1.
FTSE 350 companies to set their own aspirational targets for female board appointments by 2013 and 2015. FTSE 100 companies should set their target to at least 25% by 2015. FTSE 250 companies should look to achieve 25% in a longer time frame.
FTSE 100 appointments on track for achieving target by end of 2015
2.
FTSE 350 companies to disclose proportion of women on board, in senior executive positions and across company as a whole.
Narrative reporting obligations came into force 1 October 20132
3.
Financial Reporting Council to amend UK Corporate Governance Code to require boards to have and disclose a board diversity policy
UK Corporate Governance Code amended October 2012 (provisions B.2.4 and B.6)
4.
FTSE 350 companies to disclose their aspirational targets for women on boards, gender breakdown in the organisation and board diversity policy
UK Corporate Governance Code amended October 2012 (provisions B.2.4 and B.6)
5.
Nomination committee should make meaningful disclosures about their search and appointment process and how diversity is addressed in their company
UK Corporate Governance Code amended October 2012 (provisions B.2.4 and B.6)
6.
Investors should proactively engage on the issue of gender with FTSE 350 companies
Ongoing
7.
FTSE 350 companies should periodically advertise non-executive positions to encourage greater diversity in applications
Ongoing
8.
Executive search firms to draw up voluntary standard of conduct to redress Executive Search Firm Voluntary Code gender imbalance and encourage best practice of Conduct drawn up in 2011, with increasing numbers of firms signing up
9.
Identifying and investing to support women and establish a talent pipeline for future board appointments
Ongoing
10.
Davies Steering Group to be established and meet every 6 months
Ongoing
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Market Tracker
Executive summary
Beyond 2015
In this report, we have looked at and analysed board appointments made by FTSE 350 companies between 1 March 2015 and 10 June 2015.
FTSE 350 companies have until the end of 2015 to achieve the targets set by Lord Davies in his 2011 report. An end of year report by the Davies Steering Group is anticipated in early 2016, in which we would expect to see full statistics and analysis on board appointments made since 1 March 2015 to the end of the calendar year. The Davies Annual Report 2015 made it clear that the Davies Steering Group expects FTSE 100 companies will achieve the 25% target set in 2011.
The FTSE 350 has seen a continued rise in the representation of women on boards in the three months following the publication of the Davies Annual Report 2015 in March 2015. In that period • T he FTSE100 saw additional female board appointments and an overall rise in the percentage of women on boards from 23.5% to 24.4%. • The FTSE 250 saw 26 new board appointments of women and an over all increase in the percentage of women on boards from 18% to 19% • The number of all-male boards in the FTSE 250 has reduced from 23 to 19. • 33 of the 34 board appointmerts of women across the FTSE 350 were to r on-executive roles, indicating that there is more to be done to encourage companies to appoint women to executive positions. Halfords Group plc (a FTSE 250 company) was the only company to appoint a woman as an executive director between March and June 2015. • The number of FTSE 100 companies meeting the 25% target has increased from 41 to 47. • The number of FTSE 250 companies already meeting the long-term 25% target has increased from 65 to 77.
However, the Davies Steering Group does not see the achievement of the 25% target as the end game. In the end of year report we would also expect to hear more about Lords Davies’ thoughts on the future, including: • how to sustain the pace of change • the ongoing work required by the FTSE 250 to achieve the 25% target and beyond • whether the voluntary, business-led approach to address gender imbalance is working (in contrast to the quota-based approach being proposed by the EU) • how to build on the pace of change and continue to improve female representation on FTSE 350 boards, working towards genuine gender parity • increasing the number of women in executive director roles, and • ensuring that companies give thought to succession planning and the pipeline of women in their organisations that will be appointed to board roles in the future 17
Market Tracker
We will have to wait and see whether Lord Davies proposes increased targets for appointing women to the boards of FTSE 350 companies over the next few years. We think it is likely that Lord Davies will want companies to work towards a voluntary target of at least 33% women representation on boards by 2020, given the ongoing debate in the background regarding the proposed EU Directive on legislative quotas (see section 4 of this report). We also wonder whether Lord Davies might propose targets in relation to the improvement of representation of women in executive director roles, as clearly there is still work to be done in this area. It will be interesting to see if the Davies Steering Group also recommends a shift in focus to entities listed outside the FTSE 350 and on AIM, and whether it takes a look at the broader issue of diversity in boardrooms and the workplace across all minority groups. It is clear that there is a danger of fatigue on this subject matter and a risk that the pace of change will slow down over time. This has already been happening to some extent in the FTSE 250 (the Davies Annual Report 2015 showed that overall female board appointments in the FTSE 250 dropped from 31.1% in 2013/2014 to 23.9% in 2014/2015). Lord Davies and his Steering Group will have to come up with initiatives and ideas to help motivate the FTSE 350 to sustain and improve upon the rapid evolution of diversity within boardrooms and ensure that women continue to be appointed and stay appointed as directors.
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UK’s voluntary approach vs EU’s proposed directive In November 2012, around 18 months after Lord Davies’ Women on Boards report, the EU Commission announced a proposal for a directive aimed at improving the gender balance in company boardrooms. The UK is against the imposition of the quantitative objective via legislation. “We have continued to defend our approach with our European counterparts as the EU directive on legislative quotas continues in the background. The Directive suggests all listed companies in member states should aim for at least 40% of Non-Executive Director positions to be women or 33% of the whole board. The UK believes that countries should be able to take action according to their starting position, legal system and unique business environment. While we respect the right for others to put quotas in place, we remain committed to a voluntary, business-led approach.” Davies Annual Report 2015, March 2015, page 20 The debate on the proposed EU directive is continuing in the EU Council. It has been some time since any update on the progress of talks, so the likely timescales for implementation of this directive are unknown. Of course, the directive could be a nonissue if by the time it is implemented the UK has already achieved 40% non-executive (or 33% overall board) female representation at listed companies by 2020 using its own ‘equally effective’ measures. It could also be a non-issue if the UK withdraws from the EU as a result of the referendum proposed for 2017.
Lexis PSL Corporate Women on boards – mid-year update 2015 ®
FTSE 100: 24.4% women on boards
19%
24.4% 47 FTSE 100 companies ...
47% ... with 25% or more women on boards
19 FTSE 250 companies ...
7.6% ... with all-male boards
Market Tracker
FTSE 250: 19% women on boards
77 FTSE 250 companies ...
30.8% ... with 25% or more women on boards
D ownload the full report at lexisnexis.co.uk/MTTR/ Womenboards/Corporate
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LexisPSL
Voting at UK listed public companies: procedure, trends and developments This is an extract from a Practice Note which covers ownership and voting at UK listed public companies, examining the participants involved (such as custodian banks, proxy agents and institutional investors) and the relevant laws, regulations and guidelines. It highlights recent trends and developments. Voting—in practice The rise of dematerialised and intermediated shareholdings challenges the traditional voting process. For example: • a notice of meeting is sent not to the beneficial owners or even to investment managers but to nominees of custodian banks--passing the information on through chains of custody could be costly and time-consuming, and • it is the custodian bank nominee company that is entitled to lodge a proxy vote or attend and vote in person—if there were not a system in place it might have to seek voting instructions from hundreds of underlying investors in a short period of time
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This situation created the need for proxy vote agents. Vote agents act as a conduit between custodian banks and institutional investors. Their role is: • to provide institutional investors with details of upcoming shareholder meetings, and • to enable investors to record their proxy vote instructions The largest agents are Broadridge and ISS. The following diagram illustrates, albeit in a simplistic way, the shareholding voting chain or process in action:
Poll voting amongst FTSE 350 companies Poll voting is more popular amongst larger companies, or companies where although there are multiple shareholders, one member holds a large number of shares and the remaining shareholders have much smaller holdings. During the 2014 AGM season, it appears that poll voting was used more frequently by FTSE 100 companies than by FTSE 250 companies.
LexisPSL
Our Market Tracker Trend Report—AGM season 2014 shows that of the 234 FTSE 350 companies reviewed, 143 stated that they were proposing all resolutions be on voted by way of a poll rather than on a show of hands which means that around 61% of companies opted for automatic poll voting. Unsurprisingly, poll voting was more popular amongst FTSE 100 companies, with 86% choosing the procedure, than amongst FTSE 250 companies, with only 48% opting for poll voting. This may have been because of anticipated low turnout at FTSE 250 companies’ AGMs or due to the costs involved in conducting a poll.
Recent trends and developments UK equity market continues to evolve The market remains dynamic: • ‘rest of the world’ ownership stood at an estimated 53.2% of the value of the UK stock market at the end of 2012, up from 30.7% in 1998 and 43.4% in 2010 (ONS Statistical Bulletin (September 2013): Ownership of UK Quoted Shares, 2012) • shares held in omnibus accounts accounted for an estimated 59.4% of total holdings by value at the end of 2012, up from 44.9% at the end of 2010 (ONS Statistical Bulletin (September 2013): Ownership of UK Quoted Shares, 2012) • although the share held by individual investors is in decline this has recently been offset by a rise in the proportion held by employees and (increasingly) directors (The Kay review of UK equity markets and long-term decision making: Final Report July 2012) More work on engagement needed The Kay Review of UK Equity Markets and Long-Term Decision Making (2012) concluded that investment chains were too long and resulted in increased costs, misaligned incentives and reduced trust. It recommended action and reform on many fronts, including: • revisions to the Stewardship Code • the adoption of new good practice statements for directors, asset managers and asset owners • the establishment of an investors’ forum to facilitate collective engagement by investors in UK companies • a review by the Law Commission of the legal concept of fiduciary duty as applied to investment, and • exploration of the most cost-effective means for individual investors to hold shares directly on a share register 21
LexisPSL
Since the Kay Review: • the Stewardship Code has been revised (September 2012) • the UKCG Code has been revised (September 2014), for example to require companies to ex-plain when publishing general meeting results how they intend to engage with shareholders when a significant percentage of them have voted against a resolution • the Collective Engagement Working Group (CEWG) has been established, supported by the ABI, IA and NAPF • as recommended by the CEWG an Investor Forum has been established • the ABI has established an Investor Exchange (now under the IA umbrella) to enable any significant shareholder to proactively raise a concern about a UK listed company with other shareholders, and • in July 2014 the Law Commission issued a report titled ‘Fiduciary Duties of Investment Intermediaries’ (see below) Service providers’ code of conduct In March 2012, the European Securities & Markets Authority (ESMA) launched a consultation on the proxy advisory industry in Europe and the role of the industry in the shareholder voting process, which concluded that the industry should be encouraged to develop its own code of conduct. A drafting committee, the Best Practice Principles Group (BPPG), was formed in 2013 from industry to develop a draft set of best practice principles for providers of shareholder voting
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research and analysis, which were the subject of a consultation in October 2013. In March 2014 it issued ‘Best Practice Principles for Providers of Shareholder Voting Research & Analysis’ (Principles). These Principles are designed to govern, on a comply-or-explain basis, the nature and character of governance research services, the standards of conduct that underpin those services and how the signatories to the principles interact with other market participants. ESMA is currently reviewing the development of the Principles and, requested views (in its Call for Evidence in June 2015) on how stakeholders perceived the most recent proxy seasons (after the Principles were established) to assess the extent to which new trends or changes in proxy advisors’ approaches have developed. Specific areas in which feedback was sought included: • width and clarity of the scope of entities covered by the Principles • drafting of the Principles • assessment of the quality of the signatory statements • impact of the Principles on the proxy advisory industry in practice • whether other measures may be necessary to increase understanding of and confidence in the proxy advisory industry The consultation, which closed on 27 July 2015, received a number of responses from those participating in the voting
chain, eg proxy advisors, investors, companies listed in Europe, proxy solicitors and consultants. Looking forward Law Commission report and Government response
In October 2014 the Government confirmed that: • HM Treasury and the Department for Business, Innovation & Skills will consider whether the system works effectively and efficiently for both investors and companies (this will include exploring the most cost-effective means for individual investors to hold shares directly on an electronic register), and • in light of the global nature of financial markets the Government will take a lead in negotiating improvements to the substantive laws on intermediated securities at both a European and international level
In 2013 the FRC: • identified encouraging signs of increased engagement both at the top of the market and at smaller companies with concentrated registers while noting an apparent ‘engagement deficit’ for medium-sized companies starting from the lower end of the FTSE 100 Index, and • noted that the Shareholder Voting Working Group (an industrywide investor group) was in the process of assessing whether there are any steps that can be taken to address concerns about the voting chain, specifically that shareholders often have little time to make considered decisions before having to submit their votes while companies say that they do not receive the bulk of votes until a day or two before the AGM (FRC: Developments in Corporate Governance 2013: The impact and implementation of the UK Corporate Governance and Stewardship Codes) Virtual meetings The fact that both individual and institutional investors rarely attend AGMs has led some to conclude that physical AGMs are fatally flawed and to propose virtual-only AGMs. The ABI strongly refuted arguments to this effect (‘Improving Corporate Governance and Shareholder Engagement, 2013’). PIRC too considers that it is important to retain meetings in person so that directors can be held to account for their actions and their responsiveness to shareholder concerns (‘UK Shareowner Voting Guidelines 2015’).
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LexisPSL
In ‘Fiduciary Duties of Investment Intermediaries’ the Law Commission concluded that: • the law governing intermediated securities is not as certain as it should be • there is a lack of transparency over who ultimately owns a listed company’s shares, and • the practice of holding shares in nominee accounts leads to investors being deprived of their rights as owners It recommended that the Government review the current operation of the system.
Further work on engagement needed
LexisPSL
Q&As Q&As are high level summaries of real life problems or issues that our customers face, and are sent to us via the LexisAsk service for LexisPSL subscribers. The Q&As provide a quick overview of the relevant key considerations, together with links into useful information from LexisPSL and LexisLibrary, allowing either a quick refresher or a starting point for deeper research. Q: What is a ‘realised profit’ for the purpose of the Companies Act 2006 provisions on distributions? Are sums in a company’s revaluation reserve a ‘realised profit’? Can a company’s revaluation reserve be capitalised to fund a bonus issue of shares? Distribution is given a wide definition for the purpose of Part 23 (ss 829-853) of the Companies Act 2006 (CA 2006), meaning every description of distribution of a company’s assets to its members, whether in cash or otherwise, with four specific exceptions. In particular, an issue of fully paid or partly paid bonus shares is not a distribution for the purposes of the CA 2006. A company (whether public or private) can only make a distribution: • out of profits available for the purpose (ie its distributable reserves) (CA 2006, s 830), and • in the case of a public company that is not an investment company, if the net asset test is satisfied (ie as long as the company’s net assets are not less than the aggregate of its called-up share capital and undistributable reserves and are not reduced to less than that amount by the distribution) (CA 2006, ss 831, 833) A company’s profits available for distribution are its accumulated, realised profits (so far as not previously utilised by distribution or capitalisation), less its accumulated, realised losses (so far as not previously written off in a reduction or reorganisation of capital duly made), unless it is an investment company or a company carrying on long term insurance business (to which a slightly different calculation applies) (CA 2006, ss 830(2), 832, 843, 853). The directors must use the company’s relevant accounts in order to determine whether it is able to make a distribution that complies with CA 2006, Pt 23 (CA 2006, s 836(1)). The CA 2006 provisions on distributions are without prejudice to any rule of law, enactment or any provisions of a company’s articles of association restricting the sums out of which, or the cases in which, a distribution may be made. This preserves, in particular, the common law prohibition on distributions out of capital. For further information on the law and practice relating to the making of distributions, see Practice Note: Dividends and distributions. Realised profits and the revaluation reserve The meaning of ‘realised profits’ and ‘realised losses’ is key when determining whether a company has profits available for distribution.
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CA 2006, s 853(4) provides that references to ‘realised profits’ and ‘realised losses’, in relation to a company’s accounts, are to ‘such profits or losses as fall to be treated as realised in accordance with principles generally accepted at the time when the accounts are prepared, with respect to the determination for ac-counting purposes of realised profits or losses’. Therefore, the question of what constitutes ‘realised profits’ and ‘realised losses’ is one of accounting practice. The intention is that the concepts of ‘realised profit’ and ‘realised loss’ are fluid ones that may change in line with generally accepted accounting principles. The Institute of Chartered Accountants in England and Wales has published detailed guidance on how to determine what constitutes ‘realised profits’ and ‘realised losses’ in the context of distributions under CA 2006, TECH 02/10 (October 2010). This considers, among other things, the provisions of the CA 2006 relating to the treatment of certain accounting items for the purpose of the CA 2006 provisions on distributions. The guidance indicates that, generally speaking, any sums standing to the credit of a revaluation reserve will not be ‘realised profits’ and, therefore, cannot form part of a company’s profits available for distribution. However, such sums can become ‘realised’ in certain circumstances (see paragraph 3.9 of TECH 02/10). An accountant’s advice should always be sought if there is doubt about the correct treatment of the revaluation reserve of a company, taking into account its particular circumstances. Bonus issue of shares and the revaluation reserve A bonus issue of shares is the allotment of new shares by a company to its existing shareholders, in proportion to their existing holdings. It does not change a shareholder’s percentage holding in the company. On a bonus issue, the shares are usually allotted fully paid, without any payment being required from the recipient shareholders. The bonus shares are paid up, when allotted, by a capitalisation of existing reserves of the company. As mentioned above, an issue of fully paid or partly paid bonus shares is expressly excluded from the definition of distribution (CA 2006, s 829(2)(a)), meaning that there is no need for a company to pay up the bonus shares from its profits available for distribution. In addition, as it is an issue of new shares, a bonus issue is not caught by the restriction in CA 2006, s 849, which prohibits a company from applying an unrealised profit in paying up debentures or any amounts unpaid on its issued shares. Therefore, a company may capitalise its revaluation reserve to fund an issue of fully or partly paid bonus shares, subject to it having the power to do so in its articles.
issue of partly paid bonus shares and its articles do not contain the powers it needs to do so or contain restrictions on those powers, then its articles will need to be amended appropriately.
Q: Where a partnership only consists of two partners, how would provisions relating to expulsion apply in a partnership agreement? Would it be possible for one partner to expel the other partner? Further where there are only two partners, how would provisions relating to meetings and voting apply? And how would these apply in relation to voting on expulsion?
Dissolution by notice
The answer to these queries will very much depend on the terms of the partnership agreement. However the following are the main considerations. Expulsion The Partnership Act 1890 (PA 1890) provides that no majority of partners can expel a partner unless such a power has been expressly agreed by the partners (PA 1890, s 25). Therefore there can be no expulsion without an express clause to this effect. If the partnership agreement does contain such a provision, it should be carefully reviewed to ensure that the expulsion falls within the terms of the clause (eg does the clause expressly allow for one partner to expel the other? Is the right of expulsion only exercisable in certain circumstances and, if so, have these been satisfied?). In addition, it is important to comply with the procedural requirements set out in the partnership agreement. It would be prudent to provide the partner with details of the grounds for his expulsion and an opportunity to defend himself. Any power of expulsion should be exercised in good faith for the benefit of the firm as a whole and not for the partner’s own ends. Assuming that it is possible to expel the partner in this manner, the terms of the partnership agreement will need to be reviewed to see how the outgoing partner’s share in the partnership is dealt with on his expulsion. Unless a new partner is admitted prior to the expulsion, there will be a general dissolution of the partnership at the time of the expulsion since a partnership requires two or more persons to be acting in common in the business.
If a company does have the power to capitalise reserves in order to fund a bonus issue of shares in its articles, it is usual for the articles to require an ordinary resolution of the shareholders to exercise that power (eg, as in the model articles for private companies limited by shares, art 36, the model articles for public companies, art 78 and Table A, reg 110). The exact provisions of a company’s articles should always be checked, along with the terms of any shareholders’ agreement.
Another option which may achieve a similar outcome would be for the other partner to serve a notice dissolving the partnership. We assume in this Q&A that the partnership has not been entered into for a fixed term. If this is correct, PA 1890, s 32(c) provides that subject to any agreement between the partners, any partner may dissolve the partnership by notice in writing. The partnership agreement should therefore be reviewed for any powers to dissolve the partnership. Written partnership agreements usually exclude or restrict the statutory right to dissolve the partnership by notice and commonly include an exhaustive list of ways in which the partnership may be terminated. Again, any power to dissolve the partnership should be exercised in good faith in the best interests of the partnership. Automatic dissolution on bankruptcy We assume that at this stage the partner concerned is not bankrupt. If the partner is or becomes bankrupt, PA 1890, s 33(1) provides that unless the partners agree otherwise, a partnership is dissolved by the death or bankruptcy of any partner. The partnership agreement should be reviewed to see whether this statutory provision is excluded or restricted. Meetings and voting The partnership agreement will need to be reviewed for any provisions relating to voting and meetings. In the absence of any specific agreement to the contrary, the default position is that any differences as to ordinary matters connected with the partnership business may be decided by majority vote, but a change in the nature of the business requires unanimous consent (PA 1890, s 24(8)). Therefore where you have only two partners, the effect of this is that ordinary matters will also require unanimous consent.
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LexisPSL
A company must have a specific power in its articles to capitalise reserves and to use those capitalised reserves to fund an issue of bonus shares (eg, as in the model articles for private companies limited by shares, art 36, the model articles for public companies, art 78 and Table A, reg 110). In particular, care should be taken where a company is proposing to fund an issue of partly paid (as opposed to fully paid) bonus shares, as the model articles and Table A 1985 only allow sums to be capitalised in the allotment of fully paid shares. In addition, the model articles for private companies limited by shares provide that all shares must be fully paid up at the time of issue. If a company is proposing to fund an
Flowchart: Which demerger route is most tax effective? LexisPSL
This flowchart is high-level summary of the tax issues that may lead a company to choose a particular route to demerger. Does the company have, or can it create, distributable reserves at least equal to the book value of the demerged business? No Yes
Would the demerger satisfy the tax conditions in order to qualify as an exempt distribution? (See Note)
No
A statutory (dividend) demerger is unlikely to be appropriate. Instead consider the capital reduction or liquidation routes
Yes Yes Is there a prospect of a chargeable payment being made within the five years after the demerger?
No
A statutory (dividend) demerger may be a tax effective option. Next, decide between the direct and indirect (ie threecornered) routes.
Capital reduction demerger – disadvantages include the difficulties of ensuring that the share capital of the holding company is such that there is no income distribution for shareholders.
Would it be advantageous for the demerger to be of trading assets, rather than (or as well as) shares in one or more subsidiaries?
No
If the direct demerger route were chosen, would the target company be able to avoid a taxable gain, for instance by using the substantial shareholding exemption or capital losses?
Yes
Would a direct demerger trigger a clawback of SDLT group relief?
Note: This means, in particular, that both the demerged and retained businesses must be carrying on trading rather than investment activities, and the demerger must not be in contemplation of a sale of either business to an outside party.
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Yes
No
An indirect (three-cornered) statutory demerger may be the most appropriate route
Yes
No
A direct statutory demerger may be appropriate. The direct route is simpler than the indirect, so if the tax effects of both are the same, the direct route may be preferable.
Liquidation (s 110) demerger – requires the appointment of a liquidator, which has implications for cost, timing and reputation.
What a wind up!
Company Secretary’s Review
Julian Grant from Fieldfisher’s Corporate Group, London.
The court found that a duty of care at common law was owed to the company in these circumstances. The amount of damages payable by Companies House will be assessed at a later hearing, but it has been reported that the claim will be for approximately £9m. Facts On the 28th of January 2009 the High Court made a windingup order against Taylor and Son Limited. The winding-up order was submitted to Companies House by the Official Receiver without a company number and was incorrectly entered against Taylor and Sons Limited (the Company), which was not subject to any insolvency proceedings. The error led certain suppliers and creditors to believe, mistakenly, that the Company was in liquidation and they therefore refused to extend credit and supply goods to the Company. The result of the Companies House error was that the Company had to be put into administration and has now ceased to trade. Although the error was picked up early by the Company, and Companies House quickly rectified the publicly available Register after the mistake was discovered, irreversible damage to the Company had already been done. Once the error was in the public domain a chain reaction began and the course to administration was unstoppable. Although the Companies House main website can be rectified quickly, there are a number of subscriptions for bulk information which are sent regularly to credit reference agencies and similar information providers and it is very difficult to amend any errors in the information supplied to them. It was the passing on of the error in the information given to such services which caused the error in this case to have such a severe financial impact on the Company. Did Companies House owe a duty of care to the Company? Companies House is required, by the Companies Act 2006, to maintain a register of information about all limited companies registered in the United Kingdom. The information contained on the Register is frequently used by potential creditors, suppliers and customers to assess the standing of companies they are considering dealing with. Indeed, it is a key tenet of company law that, in order to enjoy limited liability status, a company must make certain information publicly available. Therefore Companies House provides a very important service which oils the wheels of commerce in the UK. However, the fact that limited liability companies are required by statute to provide information to Companies House, and the fact that Companies
House is required to maintain a register of such information, did not mean that a statutory duty of care arose requiring Companies House to ensure that all information entered on the Register is accurate. There was nothing in the Companies Act to justify a finding that this was the intention of Parliament. The court instead found that a common law duty of care can arise under the normal rules of negligence. If there had been a statutory duty of care, then this would have meant that anyone suffering economic loss as result of negligence by Companies House could potentially bring a claim. By finding that a common law duty of care arose, the court was able to apply the more restrictive rules of negligence, which meant that the duty of care was only owed to the Company and not to the public at large. This is an important aspect of the case because many people other than the Company were directly affected and will have suffered loss as a result of this kind of error by Companies House: employees have lost jobs and suppliers terminated potentially lucrative contracts on the basis of false information. The court confirmed that this category of claimant would face severe difficulties in bringing a claim for damages. The duty of care would also only arise where there is a special relationship between Companies House and the particular company, which would occur only when the record of a company is altered in a way which will probably cause serious harm to that company. No claim for damages will arise in respect of more minor errors by Companies House. Having found that at common law a relationship between Companies House and the Company existed which created a duty of care, it was clear from the facts that this duty was breached when the error was made. The court also agreed that it was clear (although disputed by Companies House) that the breach of duty had ultimately led to the administration of the Company. Conclusions This is a very unusual error and the judge noted that the evidence suggested it was without precedent. Companies House have indicated they are tightening internal procedures which will mean that, in future, documents such as winding-up orders will be rejected if company numbers are not supplied. It is worth noting that this case does not mean that Companies House will now be required to check the accuracy of information supplied to it by companies. In our practice (for example during due diligence) we periodically find filings which contain errors and it is the duty of companies submitting such filings to ensure they are accurate and to ensure that the correct company number appears on them. However, where information is supplied to Companies House, it must be accurately recorded against the correct company and companies will be able to claim damages from Companies House if they suffer significant harm as a result of an error.
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Company Secretary’s Review
Does Companies House owe a duty of care to a company, where a winding-up petition has been incorrectly registered against its name? The High Court has recently heard a case (Serby v Companies House and the Registrar of Companies) regarding a winding-up order which Companies House incorrectly registered against a company which was not actually subject to any insolvency proceedings.
LexisPSL Corporate: Meet the team
Lexis PSL
LexisPSL Corporate has an in-house team with many years of practical first-hand experience gained in private practice, dedicated to producing content specifically for corporate lawyers. Their experience, combined with hundreds of customer interviews, has shaped the ultra-practical guidance on corporate issues within LexisPSL Corporate. We also commission leading solicitors and barristers to write for us. Their extensive corporate knowledge brings an additional level of legal expertise and market practice knowledge to our content. Our recognised contributors and members of our expert Consulting Editorial Board are corporate law specialists and thought-leaders in the corporate arena today. Kavita Bassan
Anne-Marie Claydon Kavita trained at Simons, Muirhead & Burton, qualifying in 2006 in the Corporate department where she acted on private M&A transactions. She subsequently worked in the Corporate team at King & Wood Mallesons (legacy Mallesons Stephen Jaques) for a number of years where she advised and acted on a broad range of corporate matters, including private M&A, private equity transactions, regulatory and general corporate matters.
James Hayden
Anne-Marie is a corporate law specialist. Her experience encompasses private mergers and acquisitions, reorganisations, takeovers and IPOs and she has also advised on various general corporate matters. Anne-Marie qualified at Norton Rose (now Norton Rose Fulbright), where she worked for a number of years as both an associate and as a Corporate PSL. She later moved to Charles Russell to take a role as a Corporate PSL. Tara Hogg
J ames is a corporate lawyer with over 10 years’ experience as a general corporate practitioner at several major firms in London. Having trained at Eversheds, James joined the London office of US firm Morgan Lewis, before later moving on to Denton Wilde Sapte (now Dentons). His broad experience has included domestic and international private M&A, joint ventures, takeovers, IPOs, financing and general corporate advisory work for public and private companies. Eleanor Kelly
ara has over 10 years’ experience; she qualified T and worked as an associate at SNR Denton, before becoming a Corporate PSL at Clifford Chance. She has also worked in-house, on secondment to a bank and a large international corporation. Tara has advised on a wide variety of domestic and international transactions, including private M&A, joint ventures, reorganisations, takeovers and IPOs. In addition, she has extensive knowledge of company constitutional, administrative and contractual matters. Darius Lewington
leanor advised on a wide range of corporate E transactions and general company law matters as a corporate associate at Nabarro LLP. She also gained in-house experience on client secondments. Specific experience includes advising on reductions of capital, striking-off and dissolution, public company takeovers, general meetings of listed, unlisted and private companies, group reorganisations, share buybacks and private company share and asset sales and acquisitions. Jane Mayfield
Nicola Vincett J ane is a corporate lawyer with over 15 years’ experience. She has advised on equity capital markets, public company takeovers, private M&A and private equity transactions as well as corporate restructurings and general corporate matters. Jane qualified at PwCLegal where she worked for a number of years, before moving in-house as assistant general counsel at Sodexho. Prior to joining LexisNexis, Jane was a corporate associate at Rosenblatt.
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Darius is a corporate lawyer with experience in advising public and private companies on domestic and cross-border M&A, joint ventures, equity capital markets, corporate governance, company secretarial matters and general corporate work. Darius spent 20 years working in private practice in the City of London, including six years as a corporate associate at Allen & Overy and several years as a partner at a leading national law firm (with a secondment to a leading Japanese investment bank).
Nicola studied law at King’s College, London and completed the LPC at the College of Law, Bloomsbury. After 4 years working for parliamentary groups and NGOs following an LLM in environmental law from UCL, she worked for 3 years as a paralegal for two US law firms in London, assisting in the areas of corporate, funds and restructuring practice.
Omar Sheikh
Sheri Delliston-Habib mar is a Market Tracker analyst, focussing on O public M&A. He studied at Kingston University and completed the GDL and LPC at London’s College of Law. He has worked as a paralegal for various small/medium sized law firms and has undertaken pro-bono work for the Advice Services Alliance and the University of the Arts, London.
Michael Urie
J enisa is a Market Tracker analyst, focussing on IPOs and secondary offers. She studied law at QMUL and Leiden University before completing the LPC at the College of Law. Jenisa has over 8 years’ experience researching and reporting on legal market developments. Previous roles include content developer for Lexis®PSL, Legal Podcaster at Informa and Research Editor at Practical Law Company where she specialised in cross-border corporate and commercial developments in the firm’s NY office.
Michael is a market analyst, focussing on delistings, joint ventures and reorganisations. He studied law at the University of Surrey and has previously worked as a paralegal at a US-based law firm and also at a corporate PR and investor relations firm in the City of London.
Consulting Editorial Board Berwin Leighton Paisner LLP Alexander Keepin
Dentons Richard Barham
Gibson Dunn Selina Sagayam
Shearman & Sterling Jeremy Kutner
Clifford Chance LLP Patrick Sarch
Fidelity Investment Management Limited James Herbert
Kemp Little Glafkos Tombolis
Travers Smith LLP Chris Hale
Norton Rose Fulbright Chris Randall
Wedlake Bell LLP Edward Craft
Davis Polk & Wardwell LLP Simon Witty
Freshfields Bruckhaus Deringer LLP Mark Austin
Pinsent Masons LLP Louise Wolfson
Contributors 3 Paper Buildings Darragh Connell
Farrer & Co LLP James Thorne
Marriott Harrison Simon Charles
11 Stone Buildings George Hilton Philip Hinks
ForwardLegal Ed Davies
Nabarro LLP Graham Muir Dilpa Raval
Advanced Boardroom Excellence Helen Pitcher AIG Mary Duffy Ashurst Sharon Jenman Bird & Bird Matt Bonass Vanessa Young
Freshfields Bruckhaus Deringer LLP George Swan Hogan Lovells Danette Antao Peter Kohl Maegan Morrison Ignition Law Alex McPherson
CMS Cameron McKenna LLP
Jones Day Sebastian Orton
Dentons Rebecca Gordon
Jordans Corporate Law Jayne Meacham
Norton Rose Fullbright Thomas Vita Paul, Weiss, Rifkind, Wharton & Garrison LLP John Satory Salans LLP Jonathan Edgelow Lydia Sadler
Skadden Arps Slate Meagher & Flom LLP James P. Healy Richard Ho Taylor Wessing Russell Holden Vodafone Group Kendra MacDonald Wragge Lawrence Graham & Co LLP Julian Henwood Independent Authors Steven Papadopoulos
Shearman & Sterling Brian Butterwick Matthew Powell Michael Scargill
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Lexis PSL
Jenisa Altink-Thumbadoo
heri is a Market Tracker analyst, focussing on S AGMs. She studied archaeology at SOAS and UCL before completing her GDL at the College of Law, London. Sheri’s legal experience has primarily been as an investigator within finance regulators, the FSA and the OFT. Sheri gained experience as a professional support paralegal at Addleshaw Goddard before joining Lexis Nexis in January 2015. In her spare time, Sheri is a volunteer adviser at a legal advice centre in Waterloo, London.
To err is human, to spot the error, devine.
LexisDraft
Mistakes happen. Like the one above. LexisDraft helps you create quality drafts more quickly and accurately than ever before. To learn more about LexisDraft and request a demo: • Contact your Account Manager • Call 0845 520 1166 • Visit lexisnexis.co.uk/demodraft
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LexisPSL Corporate topic tree Browse LexisPSL Corporate’s topics and subtopics to find all the information you need. Each subtopic includes relevant content including practice notes, precedents, flowcharts, checklists and diagrams, as well as links to useful forms, cases and legislation. • Market Tracker
Company incorporation • Forms of business vehicle • Setting up a company • A company’s constitution
Company administration • A company’s ongoing obligations
Directors and company secretaries • • • • •
A company’s directors The company secretary Directors’ service contracts Powers, duties and liabilities of directors Transactions with directors
Corporate governance • UK Corporate Governance Code resources • The corporate governance regime • Leadership and effectiveness • Accountability • Directors’ remuneration
Members’ meetings and resolutions • • • • •
General meetings Annual general meetings Proxies and corporate representatives Resolutions Company communications
Share capital • • • • • • • • •
Shares and shareholders Allotment, issue and pre-emption Share transfers Dividends and distributions Alteration of share capital Reduction of capital Share buybacks Redemption of shares Share schemes and incentives for corporate lawyers
Audit and auditors • A company’s audit obligations • A company’s auditor • An auditor’s duties, rights and liabilities
Accounts and reports • The statutory regime • Specific content requirements • Financial reporting obligations of a company and its directors
Re-registration of companies • Public to private • Private to public • Unlimited companies
Striking off, dissolution and restoration • Striking off and dissolution • Restoration
Private M&A (share purchase) • • • • • • • •
General issues Preliminary documents Due diligence and disclosure Share purchase agreement Ancillary documents Completion and post-completion Auction sale Cross-border
Private M&A (asset purchase) • • • • • • •
General issues Preliminary documents Due diligence and disclosure Asset purchase agreement Ancillary documents Completion and post-completion Auction sale
Private M&A (intra-group reorganisation) • Share purchase • Asset purchase
Joint ventures • • • • •
Preliminary issues Joint venture agreements Articles of association Other transaction documents Cross-border joint ventures
Private equity • • • • •
Private equity investment Venture capital Buyouts Development capital Funds
Public company takeovers • • • •
Takeover Code resources Takeovers: legal and regulatory Terms and conduct of an offer Schemes
Equity capital markets • • • • •
Equity capital markets resources IPO – Main market IPO – AIM Secondary offers Financial services regulation for corporate lawyers
Partnerships • General partnerships • Limited partnerships • Limited liability partnerships
Demergers and restructuring
Lexis PSL
Market Tracker
• Demergers • Restructuring for corporate lawyers
Financing for corporate lawyers • Lending • Security • Quasi-security
Corporate crime for corporate lawyers • • • •
Bribery and corruption Money laundering and terrorist financing Corporate manslaughter Financial services offences
Environmental, health and safety law for corporate lawyers • Environmental issues on corporate transactions • CRC Energy Efficiency Scheme • Health and safety issues on corporate transactions
Insolvency for corporate lawyers • • • • •
Corporate insolvency processes Insolvency trading issues Pre-pack administrations Directors’ and members’ issues Partnership insolvency
Tax for corporate lawyers • Tax
International • Getting the Deal Through guides
Clause bank for corporate lawyers • Definitions • Clauses • Execution
Corporate monthly highlights • Monthly highlights
Q&As • Q&As
Company Secretarial • • • • • • • • •
Company incorporation Company administration Directors and company secretaries Corporate governance Members’ meetings and resolutions Share Capital Audit and auditers Accounts and reports Listed company compliance
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Reed Elsevier (UK) Limited trading as LexisNexis. Registered office 1-3 Strand London WC2N 5JR Registered in England number 2746621 VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are trademarks of Reed Elsevier Properties Inc. © LexisNexis 2015 0815-030. The information in this brochure is current as of August 2015 and is subject to change without notice.
