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This week’s edition of Corporate highlights includes LSE guidance for AIM companies on new corporate governance requirements that apply from 28 September 2018, revised FRC guidance for companies preparing strategic reports, and FCA amendments to the Listing Rules and Disclosure Guidance and Transparency Rules.
In this issue:
Equity capital markets; Corporate governance
Accounts and reports; Corporate governance
Equity capital markets
Private M&A (share purchase); Insolvency for corporate lawyers
Additional Corporate updates this week
Additional news—daily and weekly news alerts
New and updated content
Dates for your diary
Equity capital markets; Corporate governance
AIM guidance on preparing for corporate governance changes
The London Stock Exchange (LSE) has published guidance relating to the preparation by AIM and AIM listed companies for the introduction of new corporate governance requirements. From 28 September 2018, AIM companies will be required to disclose on their website details of the recognised corporate governance code they have decided to apply, explain how they comply with such code and where they do not comply, provide an explanation of their reasons for departing from such code’s provisions.
The LSE notes that it has engaged with nominated advisers in preparation for the introduction of these new requirements, noting that feedback from such engagement indicates that AIM companies are progressing well in addressing the changes to be implemented by such requirements.
In the guidance, the LSE provides answers to some of the common questions it has received during the course of the above engagement from nominated advisers. From these answers, the LSE outlines some of its views on how AIM companies can comply with the new requirements, noting among other matters that:
after 28 September 2018, an AIM company will be: (a) required to review its corporate governance disclosure annually, and (b) expected in most cases to perform this review at the same time it prepares its annual report and accounts
an AIM company’s website should include the date when it last reviewed its compliance with its chosen code and, in conjunction with this review, update its AIM Rule 26 disclosures to remain accurate
the disclosure on an AIM company’s website: (a) should be clearly presented and easily accessible from the website’s ‘AIM Rule 26’ landing page, and (b) can include information incorporated by reference, eg disclosures that are provided in a clearly delineated corporate governance section of an AIM company’s annual report, provided that the material is freely available and the statement clearly indicates where interested parties can read or obtain a copy of that material
if an AIM company has not yet made disclosure against a recognised code in its annual report, in accordance with AIM Rule 26, the corporate governance statement must be disclosed on its website by 28 September 2018
while the LSE has not prescribed a list of codes to be utilised by AIM companies, it has: (a) referred to established benchmarks for AIM company codes such as the QCA Corporate Governance Code and the UK Corporate Governance Code, and (b) confirmed that if AIM companies have a dual listing in their home state, it will be acceptable for them to report using an appropriate standard in their home jurisdiction
while the new corporate governance requirements are intended to provide information to investors to enhance the engagement between investors and the boards of AIM companies, disclosure alone does not constitute good corporate governance
For further information, see LNB News 26/07/2018 72.
Accounts and reports; Corporate governance
Guidance on the Strategic Report updated to reflect legislative and best practice developments
The Financial Reporting Council (FRC) has published an updated version of its Guidance on the Strategic Report, which is intended to serve as best practice for all entities preparing strategic reports. The guidance has been updated to reflect changes in practice and other developments which had occurred since the guidance was first published in 2014.
The guidance has been updated to reflect the new reporting requirements under the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, SI 2016/1245 and the Companies (Miscellaneous Reporting) Regulations 2018, SI 2018/860.
The revised guidance emphasises the directors’ duty to promote the success of the company under section 172 of the Companies Act 2006 (CA 2006). It also focuses on the new requirement under SI 2018/860 for companies to report on how the directors have had regard to employees and other interests when performing their duty under CA 2006, s 172 to promote the success of the company (section 172(1) statement). This new reporting requirement applies to large companies (ie those outside the scope of the medium-sized companies regime) with accounting periods beginning on or after 1 January 2019.
The principal changes relate to sections 7 and 8 of the guidance which deal with the content elements of the strategic report. Reflecting the fact that the disclosure requirements will vary according to the type of company, these sections have been organised as follows:
section 7 provides an overview of the application of the content elements to different types of entity
section 7A sets out the content elements for entities that are not public interest entities and therefore not subject to SI 2016/1245—the content elements are substantially unchanged from those in the 2014 guidance
section 7B sets out the content elements for entities that are public interest entities and therefore are within the scope of SI 2016/1245—the FRC acknowledges that there is some overlap of the content of those regulations with the pre-existing strategic report requirements for quoted companies so many companies will already be providing the required disclosures
section 8 sets out the content elements relating to the new requirement in SI 2018/860 for large companies to produce a section 172(1) statement
Other changes include enhancing the guidance on risk reporting, particularly relating to non-financial matters and enhancing the guidance in respect of reporting on broader environmental, employee, social, community, human rights, anti-corruption and anti-bribery matters—this was in part driven by SI 2016/1245 but also to reflect the increasing interest by investors in this area.
For further information, see LNB News 31/07/2018 50.
Equity capital markets
FCA amends Listing Rules and Disclosure Guidance and Transparency Rules
The Financial Conduct Authority (FCA) has published the Listing Rules and Disclosure Guidance and Transparency Rules (Miscellaneous Amendments) Instrument 2018 (FCA 2018/41) (Instrument) which amends the Listing Rules (LR) and the Disclosure Guidance and Transparency Rules sourcebook (DTR). The Instrument came into effect on 27 July 2018. It clarifies that Premium Listing Principle 6 prohibits the continuation of false markets as well as their creation and that the diversity reporting requirements in DTR 7.2 can be satisfied by including a diversity report in a corporate governance statement published in any of the formats which the FCA allows for those statements.
Following the FCA's Quarterly Consultation: No. 19 (December 2017), CP17/39, the FCA board has made changes to LR 7 and DTR 7 in the FCA Handbook. The changes are also referred to in the FCA’s Handbook Notice 57.
LR 7 changes
In CP17/39, the FCA proposed to clarify Premium Listing Principle 6 (PLP 6) which provides that a premium listed company must communicate information to holders and potential holders of its premium listed securities and its listed equity shares in such a way as to avoid the creation of a false market in those premium listed securities and listed equity shares.
PLP 6 is the direct successor of the former Listing Principle 4 (LP 4) which required a listed company to communicate information to holders and potential holders of its listed shares in such a way as to avoid the creation or continuation of a false market in those listed securities. When PLP 6 was adopted in 2014, unlike LP 4, it did not make explicit reference to the 'continuation' as well as the 'creation' of a false market.
PLP6 has now been amended to revert to the position under LP 4 by reinserting the words 'or continuation' after 'creation'.
DTR 7 changes
In the same consultation paper, the FCA also proposed amendments to DTR 7.2 in relation to requirements on diversity reporting. DTR 7.2.8AR sets out the requirements for reporting by certain issuers on their diversity policy in accordance with the provisions of the Accounting Directive.
These elements of reporting must be included in the corporate governance statement the issuer is required to make under DTR 7.2.1R and under the Accounting Directive. The issuer has the option to set out its corporate governance statement in a separate report published together with its annual report or in a document published on the issuer's website, under DTR 7.2.9R.
When the FCA introduced the diversity reporting requirements in DTR 7.2.8AR, it omitted to include explicit reference to them in DTRs 7.2.1R and 7.2.9R.
The FCA has amended DTR 7.2.1R and 7.2.9R to include the diversity reporting requirements.
For further information, see LNB News 27/07/2018 69.
FCA publishes Handbook Notice No 57
The FCA has published Handbook Notice No 57, which includes changes to the FCA Handbook made by the FCA board on 28 June and 26 July 2018, together with feedback on consultation papers (CPs) that will not have a separate policy statement (PS). The notice also includes changes made by the Board of the Financial Ombudsman Service (FOS) to its rules and standard terms on 25 July 2018 and approved by the FCA board on 26 July 2018.
The Handbook Notice includes the following instruments that are of relevance to corporate practitioners (among other instruments more relevant to banking, insurance and financial services practitioners):
Listing Rules and Disclosure Guidance and Transparency Rules (Miscellaneous Amendments) Instrument 2018 (FCA 2018/41)
This instrument is described in the above story ‘FCA amends Listing Rules and Disclosure Guidance and Transparency Rules’ (see LNB News 27/07/2018 69).
Enforcement (Social Entrepreneurship Funds, Venture Capital Funds and Money Market Funds) Instrument 2018 (FCA 2018/42)
This instrument clarifies the effects of changes made by the FCA to the rules for alternative investment funds, and sets out a decision-making mechanism for the use of the FCA's new powers in this area. The instrument came into force on 27 July 2018. Feedback on CP18/14 is published in the Handbook Notice.
For further information, see: LNB News 27/07/2018 92.
Private M&A (share purchase); Insolvency for corporate lawyers
Court of Appeal defines ‘debt’ and revisits dependency of obligations (Doherty v Fannigan Holdings Ltd)
Restructuring & Insolvency analysis: The implications of this decision by the Court of Appeal centre around the distinction between dependent and independent contractual performances, with respect to obligations of payment and delivery in relation to a share purchase agreement. Written by Rory Brown, barrister at 9 Stone Buildings.
What was the background
Fannigan Holdings Ltd (FHL) served a statutory demand, pursuant to section 268 of the Insolvency Act 1986 (IA 1986), on Mr Doherty for non-payment of the sum of £2m due for the sale to him of a tranche of shares in a joint venture company.
The registrar set aside that statutory demand on the basis that the unpaid price was not capable of being a debt for a liquidated sum for the purposes of IA 1986, s 267(2)(b). As such, it was not capable of forming the basis of a statutory demand. In reaching this holding, he found:
the obligations for payment and delivery could not be disconnected
the agreement did not create a debt to be claimed irrespective of compliance with the obligation to transfer the shares
FHL’s remedy for non-payment was to sue for damages or specific performance—absent transfer of the shares (which had not taken place) FHL had no remedy in debt for the price
The High Court reversed the registrar’s decision setting aside the statutory demand. It held that:
pursuant to the terms of the share purchase agreement between FHL and Mr Doherty (the SPA), payment by Mr Doherty for the shares was to occur first and only upon payment of the consideration were the shares to be transferred
while the payment of the consideration and the transfer of the shares were connected events, the payment was the trigger and was an absolute obligation
as the payment of the consideration was not dependent on a simultaneous transfer by FHL, the amount unpaid was a debt for a liquidated sum, which could properly form the basis of bankruptcy proceedings
What did the court decide?
In the Court of Appeal, Rimer LJ, with whom Coulson and Patten LJJ agreed, considered that the judge was wrong to regard the parties’ obligations as independent. It was clear from the terms of the SPA that Doherty and FHL’s respective obligations of payment and delivery were intended to be dependent. The intention was that completion of the sale and purchase of the shares was to take place on the same day and at the same time; and that the payment by Mr Doherty of the consideration was dependent upon his receiving the shares in exchange, just as the performance of FHL’s obligation to transfer the shares was dependent upon receiving the price. That was how the reasonable person would interpret the parties’ obligations under the SPA.
The Court of Appeal considered that to attribute to the parties the intention that either should perform his or its completion obligation except against the performance of the other’s, would be to fix them with unlikely, and uncommercial, intentions. No buyer of the shares is going to part with £2m except against receipt of the shares, any more than the seller is going to part with the shares except against the receipt of the £2m.
It followed that, while Mr Doherty breached the contract by failing to pay the price, he did not thereupon become a debtor for the consideration. FHL could sue him for specific performance or damages but it could not sue him for the consideration or serve a statutory demand.
Allowing Mr Doherty’s appeal, the Court of Appeal restored the registrar’s order setting aside the statutory demand. FHL’s application for permission to appeal to the Supreme Court was refused.
What is the future impact of this decision?
The divergent decisions in the cases of Mittal v RP Capital Explorer Fund  BPIR 1537 and the registrar’s decision in Doherty demonstrated that different judges can come to different (indeed totally contrary) conclusions as to whether a failure in breach of contract to pay a fixed price on a fixed date gives rise to a debt for the purpose of IA 1986, s 267(2).
In so far as a different conclusion was reached (obiter dictum) in Mittal, the judgment in that case can no longer be treated as authoritative. The Court of Appeal’s decision in Doherty should now be a touchstone for practitioners advising their clients on whether to invoke the insolvency regime (or if it has properly been invoked by a putative creditor). In that regard, this case is a cautionary tale—as Rimer J observed in the leading judgment, ‘FHL had its remedies for Mr Doherty’s breach. Its mistake was to attempt to deploy one that it did not have’.
For further information, see News Analysis: Court of Appeal defines ‘debt’ and revisits dependency of obligations (Doherty v Fannigan Holdings Ltd).
Additional Corporate updates this week
Updated draft regulations on business contract terms
Banking & Finance analysis: Richard Calnan, partner at Norton Rose Fulbright, and Rebecca Oliver, knowledge of counsel, consider the background to the draft Business Contract Terms (Assignment of Receivables) Regulations 2018 and how they could affect the drafting of provisions in contracts and security structures.
What is the background to the regulations?
The government has decided that it should be easier for small and medium-sized businesses (SMEs) to raise finance on their receivables. To do this, businesses need to be able to transfer their receivables to financiers, but their contracts sometimes restrict assignments. The concern is that smaller businesses are likely to enter into standard terms of business provided by larger corporate debtors which include restrictions on assignment, and that in practice it will not be possible for the SME to have the restriction removed.
The Small Business, Enterprise and Employment Act 2015 allows regulations to be made to invalidate restrictions on the assignment of receivables in particular types of contract. A draft of the regulations intended to implement that power was published in September 2017, but was withdrawn following concerns raised by the City of London Law Society that it had been drafted in wider terms than necessary, and as a result would unintentionally restrict certain provisions in financial services contracts. Since then the Department for Business, Energy and Industrial Strategy has worked with interested parties to redraft the regulations.
Draft Business Contract Terms (Assignment of Receivables) Regulations 2018 were published on 6 July 2018. See LNB News 06/07/2018 82. The regulations are due to be debated in autumn 2018 and, if approved by both Houses of Parliament, will invalidate restrictions on assignments included in certain types of contract.
What types of contract do the regulations apply to?
The regulations apply to contracts for the supply of goods, services or intangible assets under which the supplier is entitled to be paid money. However, there are a number of important exclusions from their application, including the following:
they only apply to contracts entered into on or after 31 December 2018
they only apply where the person who supplies the goods, services or intangible assets concerned, and is therefore entitled to the receivable, is an SME which is not a special purpose vehicle. Whether or not an entity qualifies in any particular case requires a detailed examination of the precise wording of the regulations. Counter-intuitively, the test is not applied at the time the contract is entered into, but at the time the assignment takes place
there is a specific exemption for contracts ‘for, or entered into in connection with, prescribed financial services’—these are widely defined to include ‘any service of a financial nature’
there are specific exclusions for particular types of contract, including certain commodities, project finance, energy, land, share purchase and business purchase contracts and operating leases
as a general rule, it would seem that the regulations only apply to contracts governed by English law or the law of Northern Ireland, but they prevent the parties from choosing a foreign law if it can be established that the purpose of doing so was to evade the regulations
the Regulations do not apply if none of the parties to the contract has entered into it in the course of carrying on a business in the UK
What do the draft regulations cover?
The regulations provide that ‘a term in a contract has no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties’.
A ‘receivable’ is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The regulations do not prevent the parties from restricting the assignment of other contract rights.
More difficult is to establish what is meant by ‘assignment’. Receivables are transferred in various ways in practice. Sometimes the transfer is outright (for instance, by way of sale); and sometimes it is by way of security (for instance, to secure a loan). The transfer may be effected by a statutory assignment, an equitable assignment, a charge or a trust. ‘Assignment’ is not defined in the regulations, so there is some doubt as to which of these transactions are covered. Although charges are not expressly referred to, they might be covered by the expression ‘assignment’ if it is given a broad interpretation.
Non-assignment clauses come in a variety of forms. They will be covered by the regulations if they ‘prohibit or impose a condition, or other restriction’ on the assignment of a receivable. The regulations expressly invalidate terms which prevent the assignee from determining the validity or value of the receivable or their ability to enforce it.
How will this affect the drafting of provisions in contracts and security structures?
If the regulations apply, a restriction on the assignment of a receivable will be ineffective. There is no necessity to alter standard form contracts to take account of the regulations—they will simply override the contractual provision. But, where practicable, it is obviously sensible for contracts to reflect the underlying law. Over time, it is likely that contracts will make express reference to the regulations in order to do this.
Receivables financiers will need to consider the extent of the regulations when drafting assignments and security documents. Because it is not clear whether charges are covered by the regulations, when taking security, the best course will be to take an assignment by way of security over a receivable where there is, or might be, a restriction—that way, it is clear that the regulations will apply.
The regulations will also be of concern to businesses receiving goods, services and in tangible assets under supply contracts. They will no longer be able to restrict the assignment of the receivable under the contract if the regulations apply. This can create a problem if the business concerned is relying on rights of set-off under future contracts with its counterparty. Although rights of set-off which exist at the time it receives notice of assignment will continue to be effective, new rights of set-off will not. Debtors under supply contracts will need to consider how best to protect themselves against this problem.
What are the differences between these new regulations and the previous draft regulations of September 2017?
The new regulations are substantially more limited in their effect than the previous draft regulations. The most important change is that the regulations now only apply where the supplier is an SME.
The new regulations also contain a very large number of new exemptions, including certain commodities and project finance contracts and operating leases. There is also a specific exemption for share purchase and business purchase contracts which means that M&A contracts should not be affected by the regulations.
There was also a concern that the earlier draft of the regulations would have prohibited negative pledges and restrictions on assignments in loan agreements, and that is no longer a concern under the new regulations.
As a result, the regulations will now be focused on the mischief they were intended to remedy—invalidating restrictions on assignments imposed by larger buyers on small and medium-sized suppliers.
For further information, see News Analysis: Updated draft regulations on business contract terms.
Challenging jurisdiction—dealing with competing jurisdiction clauses (Deutsche Bank AG v Comune Di Savona)
Dispute Resolution analysis: The Court of Appeal overturned a decision upholding a challenge to the jurisdiction of the English courts to determine a claim to certain declaratory relief. The claim concerned swap transactions, and the appellant was seeking declarations to give effect to no-advice and non-reliance clauses applicable to the transaction agreements. Difficulty arose from the fact that although the transaction agreements themselves were governed by English law and conferred exclusive jurisdiction on the English courts, the parties had entered into a previous agreement including for advisory services which was governed by Italian law and conferred exclusive jurisdiction on the court of Milan. The court was required to consider which jurisdiction clause applied to disputes regarding whether the swap transactions could be challenged on the ground of non-compliance with advisory obligations. Analysis written by Jonathan Edwards, barrister at Radcliffe Chambers.
What are the practical implications of this case?
The case illustrates the need carefully to characterise the ‘particular legal relationship’ which arises out of an agreement, before considering whether or not the claim in question relates to it. Where there are two agreements, and therefore two ‘particular legal relationships’, and they have different jurisdiction clauses it will in most cases be necessary to demarcate between them. Drawing the line will sometimes be difficult, but it was considered important in this case that the declarations closely tracked (seeking to give effect to) contractual provisions of the agreement with the English jurisdiction clause.
However, while reiterating the desirability of construing different jurisdiction clauses as being mutually exclusive so that they do not ‘compete’, it was suggested that this may not always be the outcome. If the parties may be considered to have agreed that a claim within both clauses may be brought in either jurisdiction, drafters of contracts will need to take into account that the ‘exclusive’ jurisdiction clause may be less exclusive than thought.
What was the background?
The appellant was a bank. In 2007, its London branch had entered into two separate agreements with an Italian company.
The first of these was an agreement to provide services, which included services of an advisory nature. That agreement was governed by Italian law. It also contained a clause requiring that ‘disputes relating to it must be referred to the exclusive jurisdiction of the Court of Milan’.
The second agreement was a master agreement intended to govern swap transactions that the parties were anticipated to enter into. This agreement was governed by English law and contained a clause providing that ‘each party irrevocably: i) submits to the jurisdiction of the English courts’. It also contained an entire agreement clause. The parties did then enter into swap transactions to which the terms of this second agreement applied.
The Italian company contested whether the English courts had jurisdiction, relying on the jurisdiction clause in the first (Italian) agreement, which it was said required to be given effect under Article 25 of Regulation (EU) 1215/2012, Brussels I (recast).The jurisdiction challenge succeeded in the Commercial Court in respect of the declarations which it was held were essentially concerned with an advisory role, because it was only the first agreement with the Italian jurisdiction clause that provided for advisory services. There was a demarcation between that advisory relationship and the relationship merely of counterparty to the swap transactions. This analysis was challenged in the appeal.
The natural and reasonable demarcation between the ‘particular legal relationship’ (the words used in the EU Regulation) arising out of the first agreement and that arising out of the second was not as had been held at first instance. Instead, it was held that the first agreement related generally to providing expertise/advice in the area of debt management while transactions on the terms of the second agreement each amounted to a specific legal relationship separate from the generic relationship. This conclusion was reinforced by the entire agreement clause in the second agreement, which confirmed the separateness from the earlier first agreement
It was not the case that disputed allegations, that the swap transactions had been entered into on advice given by the bank, were better understood as disputes about an advisory relationship and therefore necessarily related to the first agreement which provided services of an advisory nature. On the contrary, it was ‘self-evident’ that declarations founded on the non-reliance provisions of the second agreement related instead to the swap transactions (on the terms of the second agreement).
On the analysis of Longmore LJ, there was a clear demarcation between disputes to which the first jurisdiction clause and the second jurisdiction clause applied. Accordingly, with no overlap, the two clauses were not ‘competing’. However, it was said that sometimes there might be no realistic or even possible mutually exclusive construction of two jurisdiction clauses. As to what the result would be in such a case, it was postulated that ‘the true position may be that the parties have agreed that either jurisdiction clause can apply’
For further information, see News Analysis: Challenging jurisdiction—dealing with competing jurisdiction clauses (Deutsche Bank AG v Comune Di Savona).
Additional news—daily and weekly news alerts
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New and updated content
We have published the following new Practice Note in our Share capital topic area which considers the legal and practical implications of shares being held jointly by two or more shareholders: Joint shareholders.
We have thoroughly reviewed and updated the following Practice Note in our Company incorporation topic area: Companies limited by guarantee
To track key legislative and regulatory developments, see our Trackers:
Brexit legislation tracker
Prospectus Regulation tracker
Transparency Directive tracker
Listing Rules tracker
Disclosure Guidance and Transparency Rules Sourcebook tracker
Prospectus Rules tracker
Small Business, Enterprise and Employment Act 2015 tracker
We have added the following new Q&As this week:
Is a parent company liable for the acts or omissions of its subsidiary?
How might an individual’s usual residential address appear on the public record at Companies House?
Can the Topco resolutions required to effect a section 110 demerger, be passed as written resolutions?
If a written resolution is requested by a member or members, within what timeframe must the resolution be circulated by the company?
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