Corporate weekly highlights—6 December 2018

This week’s edition of Corporate highlights includes various Brexit-related updates, including the publication of the Attorney General’s advice to Cabinet on the legal effect of the Withdrawal Agreement, the government’s legal position statement on the Withdrawal Agreement, the opinion of the Attorney General of the European Court of Justice on whether the UK can revoke its Article 50 notice unilaterally, and the publication of the Business Contract Terms (Assignment of Receivables) Regulations 2018, SI 2018/1254 which came into force on 24 November 2018. It also includes case analyses on two recent unfair prejudice petitions and the Takeover Panel’s recent statement in the Rangers and King matter.

In this issue:

Brexit

Brexit Bulletin—Government publishes Attorney General’s advice as Parliament debates the Brexit deal

On 5 December 2018, the government published the Attorney General’s advice to Cabinet on the legal effect of the Withdrawal Agreement. The advice comprises a 6-page letter setting out the Attorney General’s legal advice on the Protocol on Ireland/Northern Ireland (only), which the government states is the full and final legal advice. In publishing the document, the government has emphasised that it should not set a precedent for any future release of Law Officers’ advice.

The advice outlines the operation of the Northern Ireland Protocol, contrasting the position in Northern Ireland, Great Britain and the UK as a whole. It examines the ‘indefinite nature’ of the backstop, the option to extend the 21 month transition/implementation period in the alternative, the review mechanism for terminating the backstop once superseded and the impact of the backstop arrangement for the EU. It largely echoes the points made by the Attorney General in the position statement (as to which see, ‘Brexit Bulletin—government publishes legal position statement on the Withdrawal Agreement’ below) and the Attorney General’s statement in the House of Commons on 3 December 2018, and covers issues flagged in the questions that followed, including the nature of the customs arrangements under the backstop, the lack of a unilateral right of termination, and the parties’ obligations of good faith. See: LNB News 03/12/2018 113.

The advice concludes by highlighting the challenging political context for the operation of the Protocol and that the issues are predominantly political, rather than legal. There is a potential legal risk that the UK could be subject to protected future negotiations with no unilateral right to terminate the backstop arrangement, to be weighed against the ‘political and economic imperative’ of reaching a long-term agreement on the legal terms of the future UK-EU relationship (to supersede the arrangements in the Protocol), which cannot be established under Article 50.

For further information, see LNB News 05/12/2018 103.

Brexit Bulletin—Lords EU Committee publishes report on the Withdrawal Agreement and political declaration

The House of Lords EU Select Committee has published a report on the Withdrawal Agreement and political declaration on the future UK-EU relationship, which were presented to Parliament on 26 November 2018.

The report outlines the key terms of withdrawal agreed in principle and endorsed by the EU27, making recommendations in each area.

The report does not endorse or reject the proposed deal. It seeks to offer a ‘dispassionate analysis’, to assist parliamentary and public debate, drawing on previous committee and subcommittee reports published since the EU referendum in 2016. The report acknowledges that there may be little or no opportunity to amend the text of either document, but signposts areas where further explanation might be required and puts questions to the government, which may be explored further in the ongoing debates in both Houses of Parliament.

The report also makes recommendations about how the Withdrawal Agreement should be implemented in domestic law, drawing particular attention to areas where Parliament may wish to play a role in scrutinising the governance and other arrangements eg in relation to any future extension of the transition period. The conclusions on the political declaration (which is not legally binding) are provisional. If the Withdrawal Agreement is approved by MPs on 11 December 2018, the EU Committees will look in more detail at aspects of the future relationship in due course.

For further information, see: LNB News 05/12/2018 14.

Brexit Bulletin—government publishes legal position statement on the Withdrawal Agreement

Earlier this week, the government published a reasoned position statement setting out the overall legal effect of the draft Withdrawal Agreement agreed in principle with the EU. Attorney General Geoffrey Cox made a statement to the House of Commons followed by questions, coming under fire for failure to publish the full legal advice in accordance with the motion passed on 13 November 2018, but declining to break convention, citing the public interest.

The 52-page document is said to describe the 'overall legal effect of the draft Withdrawal Agreement' endorsed by the EU 27 on 25 November 2018. For background reading, see: LNB News 26/11/2018 94LNB News 28/11/2018 108 and LNB News 30/11/2018 11.

The position statement takes each part of the Withdrawal Agreement in turn, along with the Protocols on Northern Ireland, Gibraltar and the UK Sovereign Base Areas in Cyprus, describing in outline the overall legal effect of the provisions.

Publication of the position statement was followed by a statement by Attorney General Geoffrey Cox, which he explained was intended to inform the debate on the motion to approve the Withdrawal Agreement and political declaration on the framework for the future relationship, which is due to proceed from 4-11 December 2018.

He noted that his statement is complemented by the position statement providing ‘detailed legal commentary’, which analyses the effect of the Withdrawal Agreement as a whole. That legal commentary has been produced with Attorney General’s approval, as an ‘accurate examination’ of the provisions of the agreement and a helpful exposition of the salient issues.

The Attorney General acknowledged the ‘unusual circumstances’ of his giving the statement and answering questions, highlighting his ‘solemn and constitutional duty to the House’, to advise on the legal questions objectively and impartially.

The Attorney General’s statement focussed on certain parts of the Withdrawal Agreement which have attracted most attention, including the Northern Ireland protocol and associated provisions and the role of EU law and the Court of Justice of the European Union.

The statement was followed by questions from the House, including:

  • the publication of the full legal advice

  • clarification on the permanence of the backstop, and

  • the definition of good faith

To view the full transcript, see Hansard: House of Commons, 3 December 2018, Vol 650.

For further information, see: LNB News 03/12/2018 113.

Advocated General says UK’s Article 50 notice of intention to leave EU can be unilaterally revoked (Wightman v Secretary of State for Exiting the European Union)

Public Law analysis: On 4 December 2018, the Court of Justice of the European Union published the opinion of the Attorney General, Campos Sánchez-Bordona, on the case of Wightman v Secretary of State for Exiting the European Union (Case C-621/18). The issue before the European Court of Justice was whether a Member State that has notified the EU of its intention to withdraw from the EU under Article 50 of the Treaty on the European Union can change its mind and unilaterally revoke that notification if it chooses to remain in the EU during the two-year negotiation period or whether it can only do so if there is a unanimous decision of the Council of the European Union (ie all the other Member States) agreeing that the Member State may do so. The opinion of Advocate General Campos Sánchez-Bordona is that Article 50 notification may be unilaterally revoked by the Member State, without having to have the consent of the other Member States. Maya Lester QC, barrister at Brick Court Chambers, who acted for the petitioners (Wightman), considers the issues before the court and the Advocate General’s opinion.

If (and only if) the full court of the Court of Justice agrees with the Advocate General (which it usually does, but not always), the case could have significant practical consequences for Brexit. Members of Parliament who will vote on whether or not to accept the Withdrawal Agreement will know that the UK can unilaterally revoke its notification of intention to withdraw from the EU, without having to seek the agreement of the other Member States in Council. As the Advocate General put it, a decision by the UK to remain in the EU ‘in the face of an unsatisfactory Brexit’ will be a valid option in EU law.

This opinion does not bind the Court of Justice, which will deliver its judgment soon.

For further information, see Case Analysis: Advocate General says UK’s Article 50 notice of intention to leave EU can be unilaterally revoked (Wightman and Others v Secretary of State for Exiting the European Union).

FCA assesses impact of EU Withdrawal Agreement

The Financial Conduct Authority (FCA) has published its EU Withdrawal Impact Assessment which was requested by the Treasury Select Committee and sets out the impact of the Withdrawal Agreement and future framework on the FCA's objectives. Andrew Bailey, FCA Chief Executive, has also written to Nicky Morgan MP, Chair of the Treasury Select Committee.

The FCA states that exiting with no deal would create 'significant challenges and risks' in terms of firms' readiness, potential market disruption and insufficient public policy solutions put in place by the EU. The FCA therefore strongly supports an implementation period, though it recommends that the duration of the period should be kept to a minimum in order to minimise uncertainty.

The FCA categorises the key consequences of exit without a Withdrawal Agreement into the following areas:

  • EU rules cease to apply—the relevant legislation will need to be converted into UK law, with changes to ensure it operates in a UK context

  • loss of passporting—while passporting could partially be replaced by equivalence, the FCA's assumption based on the position of the European Commission is that there would not be blanket equivalence decisions that allow for current market access to continue

  • the UK and EU's ability to share data may be restricted without reciprocal action by UK and EU authorities

  • the FCA has regular supervisory contact with larger firms to ensure they either have contingency plans in place or have decided not to continue to offer services in the EU

  • the UK's current regulatory and supervisory co-operation with EU and national authorities under EU law would cease to apply, and the UK would need to rely on the existing third country framework for co-operation instead

  • the wider economic situation following exit will have both direct and indirect consequences on the FCA's objectives

For further information, see: LNB News 29/11/2018 49.

Brexit SI Bulletin—latest drafts and sifting committee recommendations, 30 November 2018

Public Law analysis: The Commons European Statutory Instruments Committee and the Lords Secondary Legislation Scrutiny Committee (SLSC) are responsible for the sifting process under the European Union (Withdrawal) Act 2018 ( EU(W)A 2018). These committees scrutinise proposed negative Brexit SIs and make recommendations on the appropriate parliamentary procedure before the instruments are laid in Parliament. This bulletin outlines the latest updates and recommendations, collated on 30 November 2018.

One of the proposed Brexit SIs considered by the SLSC and noted of interest by SLSC Sub-Committee A was the Draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018.

For further information, see News Analysis: Brexit SI Bulletin—latest drafts and sifting committee recommendations, 30 November 2018.

FMLC highlights legal uncertainties arising from draft Brexit SIs for investment funds

The Financial Markets Law Committee (FMLC) has issued a paper that highlights legal uncertainties arising from the changes proposed by the draft Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 and the draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018. The draft statutory instruments were published by HM Treasury in order to onshore EU legislation related to investment funds and their managers.

The FMLC has raised the following issues regarding the draft investment fund SIs:

  • references to other legislation—it is unclear whether references to EU legislation will take into account changes in EU law before and after exit day

  • temporary marketing provisions for funds—the FMLC raises a number of questions regarding the proposals for an EEA alternative investment fund manager (AIFM) to be able to continue marketing an alternative investment fund (AIF) in the UK after exit day

  • temporary recognition of UCITS—it is unclear whether an EEA UCITS manager would also be considered to be managing an AIF and therefore need to vary its FCA permission. It is also unclear whether the current exemption for UCITS from preparing a Key Information Document (KID) under the PRIIPs Regulation will end on 31 December 2019, as planned

  • arrangements for delegation by AIFMs—it is unclear whether existing delegation arrangements which are in place as of exit day will be grandfathered or whether these will have to be reappraised

  • the restriction on promotion of sub-funds—the proposal to require separate recognition of sub-funds regarded as AIFs raises questions about whether an EEA UCITS which benefits from the temporary recognition regime will need to produce a UCITS KID, while a PRIIPs KID will need to be produced for the new sub-fund

  • the transfer of functions to HM Treasury—market participants have highlighted that new SIs might be too cumbersome a mechanism, in light of the pace at which new market practices and products emerge

The FMLC has encouraged HM Treasury and the government to publish, wherever possible, guidance which might enable impacted funds and managers to begin planning for the future.

For further information, see: LNB News 30/11/2018 45.

Brexit financial services draft SIs—30 November 2018

Financial Services analysis—30 November 2018: HM Treasury published the draft Market Abuse (Amendment) (EU Exit) Regulations 2018 SI (to add to the explanatory memorandum published on 21 November 2018). Other draft SIs published include the draft Credit Rating Agencies (Amendments etc) (EU Exit) Regulations 2018, the Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2018 and the Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2018.

The draft Market Abuse (Amendment) (EU Exit) Regulations 2018 SI was published by HM Treasury on 30 November 2018 to add to the explanatory memorandum published by HM Treasury on 21 November 2018. However, we note that subsequently the SI was removed from HM Treasury’s website and no explanation for this has been provided. See Brexit Financial Services draft SIs published—21 November 2018 for further information.

For further information, see News Analysis: Brexit financial services draft SIs—30 November 2018.

Alternative Investment Fund Managers (Amendment etc)(EU Exit) Regulations 2018

On 30 November 2018 the government published the draft Alternative Investment Fund Managers (Amendment etc)(EU Exit) Regulations 2018. The draft SI (if made) would amend legislation in the field of financial services relating to the regulation of alternative investment fund managers, including:

  • the Alternative Investment Fund Managers Regulations 2013, SI 2013/1773

  • the Alternative Investment Fund Managers (Amendment) Regulations 2013, SI 2013/1797

  • the EU Commission Delegated Regulation (EU)  231/2013 supplementing EU Directive 2011/61/EUof the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision

  • the EU Commission Implementing Regulation (EU) 447/2013 establishing the procedure for AIFMs which choose to opt in under Directive 2011/61/EU of the European Parliament and of the Council

It would also revoke:

  • Commission Implementing Regulation (EU) 448/2013 establishing a procedure for determining the Member State of reference of a non-EU AIFM pursuant to Directive 2011/61/EU

  • Commission Delegated Regulation (EU) 2015/514 on the information to be provided by competent authorities to the European Securities and Markets Authority pursuant to Article 67(3) of Directive 2011/61/EU

For further information, see: LNB News 30/11/2018 107.

Financing for corporate lawyers

Business Contract Terms (Assignment of Receivables) Regulations 2018

On 30 November 2018 the made version of the Business Contract Terms (Assignment of Receivables) Regulations 2018, SI 2018/1254, was published. The Regulations were made on 23 November 2018 and came into force on 24 November 20218. The Regulations apply to any term in a contract entered into on or after 31 December 2018. There are no changes from the draft version published on 6 July 2018. The Regulations aim to facilitate access to finance for businesses, by nullifying terms in business contracts which prohibit or restrict the assignment of receivables in England, Wales and Northern Ireland. This includes terms which prevent an individual to whom a receivable is assigned from enforcing it or determining its validity or value.

The assignment of receivables (ie invoices and other rights to be paid money under a contract) is a mechanism by which businesses are able to raise finance based on money owed to them. The regulations would make ineffective any contract term which prohibited the assignment of receivables. By doing so, it is hoped that small and medium-sized enterprises will be able to use all of their customer debts to raise finance through invoice discounting (sometimes called 'factoring' of debts) not just those customer debts arising under contracts which do not contain a prohibition or restriction on assignment of contracts or rights arising under it. The Regulations will not apply if the individual to whom the receivable is owed is a large enterprise or a special purpose vehicle, and various types of contracts (including contracts that have been entered into in connection with or for the purpose of the transfer of all or part of a business (including transitional services agreements)) are excluded from the scope as well.

For further information, see: LNB News 06/07/2018 82.

Public company takeovers

Hearings Committee publishes ruling in Rangers and King matter

On 29 November 2018, the Takeover Panel published Panel Statement 2018/19 (PS 2018/19) in the matter of Rangers International Football Club plc (Rangers) and Mr David Cunningham King. PS 2018/19 sets out the ruling of the Chairman of the Hearings Committee (Committee) and the reasons for ruling against Mr King’s request to convene a Committee meeting under Rule 2 of the Procedure of the Committee (Committee’s Rules) to review a ruling of the Panel Executive (Executive) which confirmed that Mr King’s obligation to procure a mandatory offer for Rangers’ shares under Rule 9.1 of the Takeover Code (Code) extended to the holders of new shares issued during the offer period.

In his ruling, the chairman examined whether the provisions of the Code clearly indicate that a mandatory offer under Rule 9 should extend to shares issued by the offeree during the offer period and concluded that when reading the Code provisions regulating the conditions and consents attaching to a Rule 9 offer in conjunction with those that control the issue of new shares by an offeree during an offer period, it becomes clear that a Rule 9 offer extends to the holders of shares issued during an offer period, provided such shares are issued in compliance with the Code.

An offer made under Rule 9 will normally become unconditional once the offeror and persons acting in concert with it hold shares carrying more than 50% of the voting rights before the offer is made, as new shares in the offeree cannot subsequently be issued without the consent of shareholders in general meeting (as per Rule 21.1) and the conditions on which the Panel will agree to disapply this prohibition normally include the consent of the offeror.

Persons who have acquired voting rights as the holders of shares issued in the placing will need to be taken into account in determining whether the offer has become unconditional.

The chairman concluded that any attempt to argue that the mandatory offer would not extend to the holders of shares acquired in the placing would have no reasonable prospect of success.

Given that the chairman concluded that any attempt to persuade the Committee to waive Mr King’s obligation to extend the mandatory offer to the holders of shares acquired in the placing would have no reasonable prospect of success, the chairman dismissed Mr King’s request to convene the Committee under Rule 2 of the Committee’s Rules.

For further information, see: LNB News 29/11/2018 90.

Corporate Governance

QCA publishes corporate governance behaviour review 2018/2019

On 3 December 2018, the Quoted Companies Alliance (QCA) and UHY Hacker Young published a joint report analysing the corporate governance disclosures of 50 AIM companies, in order to identify patterns and examine the impact of the AIM rule 26 change this year. Key findings include that companies need to take greater positive action in communicating with their shareholders and other stakeholders. Overall, the report found that the new rule has resulted in better corporate governance, but further progress can still be made. The report also outlines ‘five top tips’ for AIM company boards to follow.

The new rule 26—which came into force on 28 September 2018—requires AIM listed companies to adopt a recognised corporate governance code. Companies must now either disclose how they have complied with each principle under their adopted code or explain why they have not.

Key findings of the joint report include:

  • there has been a marked improvement in the level of disclosure and reporting abilities—95% of companies in 2017 were able to clearly articulate the strategy of the company, against 56% in 2013, and there has been an increase in the number of companies that include a report by the Chair on how the QCA code is applied

  • companies tend to have ‘consistent difficulty’ with linking strategy with the company’s business plan and its corporate governance arrangements—only 9% of companies in 2017 demonstrated how applying a corporate governance code supports the long-term success of a company and its strategy for growth

  • the onus is increasingly on boards to communicate more detail, more clearly, in order to differentiate their company from their thousands of peers on the capital markets

  • some disclosures suffered a steady decline over the years—only 18% of the companies in 2017 (compared to 43% in 2013) identified those directors considered to be independent, including the reasons for their independence and circumstances where it may be impaired

For further information, see: LNB News 03/12/2018 83.

Additional Corporate updates this week

Unfair prejudice petition—dismissal where no remedy justified (Weatherley v Weatherley)

Dispute Resolution case analysis: This analysis piece considers the judgment in Weatherley v Weatherley[2018] EWHC 3201 (Ch). The judge found that at least one of the major allegations of unfair prejudice in a petition under section 994 of the Companies Act 2006 (CA 2006) was made out. However, immediately before the trial, and during the course of the trial, the Respondents had made a number of concessions and had taken action to remedy the unfairness alleged. By the end of the trial it was not necessary to make any remedial order under CA 2006, s 996. Accordingly the petition was dismissed. This case is therefore a useful reminder that unfair prejudice proceedings are unlikely to succeed where the matters complained of have already been remedied. Charles Joseph, barrister at Tanfield Chambers, considers the issues before the court and the practical implications for lawyers.

For further information, see Case Analysis: Unfair prejudice petition—dismissal where no remedy justified (Weatherley v Weatherley).

Unfair prejudice petition—discount for minority shareholder (Davies v Lynch-Smith and others)

Corporate case analysis: This analysis piece considers the judgment in Davies v Lynch-Smith [2018] EWHC 2336 (Ch). This was a hearing of a petition for unfair prejudice seeking an order that a minority shareholder’s interest should be purchased on an undiscounted basis. The court considered whether the shareholder’s conduct justified his exclusion from management, whether it was appropriate to order that the minority shareholder’s interest be acquired and the circumstances in which it would be appropriate to apply a discount to reflect the minority shareholding in the company.

The decision provides an interesting illustration of how while a company may be justified in excluding a shareholder from a management role, it may be unfair prejudice for it to do so without giving the shareholder the opportunity to sell their interest at a fair price. The decision also considers the circumstances in which the court will order that a minority shareholder’s interest be valued on a discounted basis, where the shareholder’s conduct has contributed to the circumstances giving rise to the petition.

For further information, see Case Analysis: Unfair prejudice petition-discount for minority shareholder (Davies v Lynch-Smith and others).

Additional news—daily and weekly news alerts

This document contains the highlights from the past week’s news. To receive all our news stories, whether on a daily or a weekly basis, amend your personal settings within your ‘News’ tab on the homepage by clicking on either ‘Email’ or ‘RSS’ (depending on how you prefer to receive them) on the right hand side of the blue banner.

Dates for your diary

DateDevelopment
7 December 2018Closing date for responses to PCP 2018/1 on proposed amendments to Rule 29 of the Takeover Code, which relates to asset valuations.
The Takeover Panel proposes to amend Rule 29 to more accurately reflect current practice and provide a more logical framework for the asset valuation regime.
See News Analysis: Takeover Panel seeks to provide clarity on treatment of asset valuations and LNB News 17/10/201881.
12 December 2018The FRC launch of the Wates Principles for large private companies (Wates Principles).
On 13 June 2018, the FRC, on behalf of James Wates CBE, published a consultation on corporate governance for large private companies. The Wates Principles are the result of significant debate and exploration—including a review of similar codes in other countries and consultation with experts and representative bodies.
See: LNB News 01/01/0001 2443.
17 December 2018Proposed amendments to the Takeover Code arising from Brexit.
Deadline for comments on the Code Committee of the Takeover Panel (Code Committee) consultation on proposed amendments to the Takeover Code (Code) in relation to the withdrawal of the UK from the EU (PCP 2018/2).
See: LNB News 06/11/2018 30.
17 December 2018Privacy and Electronic Communications (Amendment) Regulations 2018, SI 2018/1189 come into force.
The Regulations, which amend the Privacy and Electronic Communications (EC Directive) Regulations 2003, SI 2003/2426 (2003 Regulations), will enable the information commissioner to impose a monetary penalty on an officer of a corporate body in addition to the body itself, where a breach occurs of regulations 19-24 of the 2003 Regulations as a result of action, or inaction, by that officer in the UK.
See: LNB News 19/11/2018 5.
21 December 2018Deadline for comments on the FCA consultation on its approach to the UK's exit from the EU.
The consultation paper (CP18/36) sets out additional proposals on how the FCA will amend its Handbook and EU derived binding technical standards if the UK leaves the EU without an implementation period. The FCA also consults on its proposed approach to non-Handbook guidance and to forms which appear in the FCA Handbook.
See: LNB News 23/11/2018 119.

Trackers

To track key legislative and regulatory developments, see our Trackers:

Latest Q&As

New Q&As added this week:

Useful information

To view analysis of the latest deals in the market and the underlying transaction documents, use our Market Tracker deal analysis tool.

To read about the latest corporate announcements, see our Market Tracker weekly round-up—30 November 2018.

To read about the latest issues and developments which we are following in Market Tracker, see our latest blog post Market Tracker weekly bulletin—5th December 2018.

Relevant Articles
Area of Interest