Corporate Update –July 2014 · Act 2006 and the Company Directors Disqualification Act 1986, includes provisions regarding: n a new obligation on companies to identify those persons

July 2014

Corporate Update – July 2014

Contents1. Company Law Update 2

2. Case Law Update 7

3. Regulatory Update 10

4. Corporate GovernanceUpdate 17

5. Takeovers Update 21

6. Antitrust Update 22

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In June 2014, the Government publishedthe Small Business, Enterprise andEmployment Bill. This Bill gives effect tothe commitment given by the Governmentas part of its G8 role, to introducemeasures to enhance corporatetransparency. Amongst other proposals,the Bill includes provisions that will place anew obligation on UK companies toidentify those persons having significantcontrol over them (broadly, a person whoultimately holds 25% of a company’sshares or voting rights or who otherwiseexercises control over the management ofthe company) and to keep suchinformation on a publically availableregister. We take a look at theseprovisions and some of the other keymeasures relating to corporatetransparency.

As we are now well through the 2014AGM season, we examine some of thedevelopments which will impact on futureAGM reporting seasons, in particular, theFRC’s consultation on the CorporateGovernance Code focusing on riskmanagement, internal control andreporting on a “going concern” basis.When implemented, these changes areexpected to apply to reporting years

beginning on or after 1 October 2014.The FRC has also published newnon-mandatory principles-based“Guidance on the Strategic Report” whichshould assist companies when draftingtheir next strategic report. See theCorporate Governance Update for details.

In May 2014, the FCA finally introducedchanges to the Listing Rules that affectpremium listed companies with controllingshareholders. We consider the impact ofthese changes and highlight thosematters that premium listed issuers willneed to address to ensure their continuedcompliance with their ongoing regulatoryobligations.

Also in May, the Upper Tribunal handeddown its long-awaited judgment in relationto the FCA’s case against Ian Hannam formarket abuse. The FCA had found, andthe Upper Tribunal has now held, that MrHannam did engage in market abuse byimproperly disclosing inside information.We take a look at the lessons for bothcompanies and their advisers involved inhandling inside information and pre-sounding activities in advance oftransactions. See the Regulatory Updatefor further information.

Welcome to our July 2014 edition of CorporateUpdate, our bi-annual bulletin in which we bringtogether the key developments in company law andcorporate finance regulation which have occurred overthe previous six months and consider how thesemight impact your business. In addition, we lookahead to forthcoming legal and regulatory change. Wehave highlighted below some of the key developmentscovered in this Corporate Update.

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2 Corporate Update

Governmentconfirms intentionto create centralregister of beneficialownersof companiesand LLPsOn 21 April 2014, BIS published theGovernment’s response to its DiscussionPaper, Transparency & Trust: Enhancingthe transparency of UK companyownership and increasing trust in UKbusiness (published in July 2013 anddiscussed in the January 2014 edition ofCorporate Update) and on 25 June 2014,the Small Business, Enterprise andEmployment Bill, encompassing theseproposals, was introduced to Parliament.This Bill gives effect to the Government’sinitiative to make it easier for small firms toestablish and grow in the UK and alsogives effect to the commitment made bythe Government as part of its G8 role toenhance corporate transparency.Ironically, some concerns have beenexpressed that the enhancedtransparency may actually make the UK aless attractive place in which to establisha company.

Key provisions of the BillThe Bill, which amends the CompaniesAct 2006 and the Company DirectorsDisqualification Act 1986, includesprovisions regarding:

n a new obligation on companies toidentify those persons with significantcontrol over the company (broadly, aperson who ultimately holds 25% of acompany’s shares or voting rights orwho otherwise exercises control overthe management of a company) and

to keep such information in apublically available register (known asthe “PSC” register”). Companies withshares admitted to trading on aregulated market (such as the MainMarket of the London StockExchange) will be exempt from thisobligation on the basis that they arealready subject to the more onerousdisclosure regime set out in Disclosureand Transparency Rule 5. Thisexemption will also apply tocompanies with shares admitted toAIM on the basis that they are alsorequired to comply with DTR 5;

n a new right for a company to imposevoting/transfer restrictions on sharesthe subject of a notice requiring thedisclosure of interests in shares, wherethe recipient of the notice fails tocomply with the requirements of suchnotice, and a subsequent warningnotice (similar to the existingprovisions in Part 22 of theCompanies Act 2006, for publiccompanies, but without the companyhaving to go to court);

n a ban on the creation of new bearershares. Existing bearer shares willneed to be surrendered to thecompany and exchanged forregistered shares within nine monthsof the legislation coming intoeffect. Bearer shares not sosurrendered and exchanged will becompulsorily cancelled;

n a ban on corporate directors (althoughthe Government intends to provide,via secondary legislation, for specificexemptions where corporate directorsmay be of value and represent a lowrisk). There is to be a separateconsultation on whether corporatemembers of limited liabilitypartnerships should alsobe prohibited;

n applying the general duties ofdirectors to shadow directors, so faras applicable;

n an extension of the directorsdisqualification regime to apply to aperson giving instructions to a directorof an insolvent company who hasbeen disqualified, where such personexercised the “requisite amount ofinfluence” over the director (i.e. theconduct of the disqualified directorwas the result of him acting inaccordance with that other person’sinstructions or directions);

n the ability of the court to make acompensation order against a directorwho has been disqualified if theirconduct has caused loss to a creditorof the insolvent company; and

n reducing the filing and record keepingrequirements for companies, inparticular by removing the requirementfor an annual return and replacing itwith an obligation to confirm at leastonce in every 12 month period that allrelevant information has been suppliedto Companies House and givingprivate companies the option todispense with the need to keepseparate statutory registers (such asthe register of members and directors)and to elect instead to have therelevant information kept solely on thepublic register at CompaniesHouse instead.

Secondary legislation will also be required,and the Government has indicated that itintends to consult on this over thesummer period, with the intention ofbringing the complete reforms into effectas soon as practicable. Transitionalprovisions will be proposed forexisting companies.

Company Law Update

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Corporate Update 3

Audit Tender –latest positionIn our January 2014 Corporate Updatewe reported on the CompetitionCommission’s (now the Competition andMarkets Authority (“CMA”)) plans toconsult on changes to the supply of auditservices, including the introduction oflegislation to require FTSE 350 companiesto put their statutory audit out to tender atleast every ten years (consistent with thebest practice recommendation in the UKCorporate Governance Code). TheCompetition Commission decided at thebeginning of 2014 to put its consultationon hold pending the finalisation oflegislation at EU level on the provision ofaudit services.

The relevant EU legislation has now beenfinalised1 and came into force on 16 June2014. Member States now have two

years within which to adopt these rules.The EU legislation will affect allpublic-interest entities (“PIEs”), whichincludes all listed companies, creditinstitutions and insurance undertakings.The provisions are wide ranging andaffect many aspects of the role of thestatutory auditor and the audit process.As regards, audit rotation however, PIEswill be required to change their auditorafter a maximum term of 10 years.Longer rotation periods may be permittedwhere a public tender has been carriedout or where a joint audit is in place. Insuch cases, the audit term may beextended by a further 10 or 14 years (i.e.to a maximum of 20 or 24 years)respectively. Transitional rules apply to theapplication of these mandatory rotationrequirements in order to avoid a “cliff-edge” effect on the audit market whenthe new rules come into force.

Now that the EU position on auditrotation has been crystallised, we canexpect to see the CMA publish its ownproposals in this regard. The CMA hasindicated previously that it intends toimplement its proposals byOctober 2014.

BIS consults on theimplementation ofnew Europeandisclosure rules forextractive industriesFollowing the adoption in June 2013 ofnew European rules requiring disclosureof payments to governments byextractive industries and loggers ofprimary forests, BIS has now put forwardits proposals for implementing these rulesin the UK.

Editor Comment:The Government has listened to responses to its earlier consultation on the questionof which companies should be exempt from the requirement to maintain a PSCregister and, helpfully, has exempted those listed companies that are subject to theDTR 5 notification rules from the regime. This is to be welcomed given the difficultiesthat might otherwise arise were such companies to become subject to different butoverlapping disclosure regimes.

On a different note, given that existing bearer shares will need to be surrendered tothe company and exchanged for registered shares within nine months of thelegislation coming into effect, companies are advised to check whether they have anyoutstanding bearer share structures that will be affected by this change.

A copy of the Government response paper is available at:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/304297/bis 14 672 transparency and trust consultation response.pdf

A copy of the Bill (as introduced on 25 June 2014) is available at:http://www.publications.parliament.uk/pa/bills/cbill/2014-2015/0011/15011.pdf

1 The legislation consists of a Directive amending the Statutory Audit Directive (Directive 2006/43/EC) and a Regulation on specific requirements regarding statutory audit ofpublic-interest entities.


4 Corporate Update

BackgroundThe European Accountancy Directivepromotes and requires greatertransparency by companies in extractiveindustries and forestry in respect of theirpayments to governments globally. Underthe Directive large limited liabilitycompanies registered in the EuropeanEconomic Area and public-interestentities must provide this informationannually on a country-by-country andproject-by-project basis.

The UK Government is keen to be amongthe first of the European Member Statesto adopt implementing legislation for thisDirective, having made a commitment topromote greater transparency during itsPresidency of the G8 countries (now G7)in 2013. Having consulted earlier this yearon its proposals for The Reports onPayments to Government Regulations2014 (“Regulations”), BIS intends toadopt implementing regulations during2014 (well ahead of the 20 July 2015deadline set by Europe). As a result,affected undertakings should expect tohave to report all relevant payments onan annual basis from the start of theirfinancial year commencing on or after1 January 2015.

The requirements of theAccountancy DirectiveIn brief, the key features of theAccountancy Directive are the following:

n Large European extractive companiesmust disclose their payments togovernments (including governmentbodies at regional and local levels andtheir agencies).

n EU registered subsidiaries need notreport separately if their parentreports on a consolidated basis under

the relevant rules of an EUMember State.

n All payments of money or in kind,whether made as a single payment ora series of related payments totallingEUR 100,000 (or its equivalent) mustbe disclosed.

n Reporting must be on a country-by-country and project-by-project basis,and broken down by type of payment(e.g. tax, royalty or licence fee).

n There are no exemptions fromreporting even where making a reportwould breach the laws of the countrywhose government is receiving thepayment or the terms of the contractunder which the payment is made.

Limited exemptions to reporting applywhere, for example, in ‘extremely rare’cases the information cannot be obtainedwithout disproportionate expense orundue delay or in circumstances where a

subsidiary is held only with a view toonward disposal.

What is proposed by the UKGovernment?The proposals made by BIS in theRegulations are necessarily limited tothose areas which are not alreadyaddressed under the AccountingDirective.

Time for reportingThe Accounting Directive requires annualreporting of payments to governmentsand requires undertakings to report forfinancial years commencing on or after20 July 2015 (i.e. the transpositiondeadline for EU Member States).Consistent with its commitment to adoptimplementing legislation early, however,BIS proposes that the first reportingperiod should be brought forward for UKregistered undertakings and reporting willbe required for financial yearscommencing on or after 1 January 2015.


Corporate Update 5

This approach will mean that UKsubsidiaries of a parent incorporated inanother EU Member State (or in a non-EU country), will need to reportindividually any relevant payments it hasmade until such time as their parentreports payments to governments on aconsolidated basis under an equivalentEU regime.

The timeframe for reporting proposed byBIS is 11 months after the end of therelevant financial year. The reportingtimeframe will be shortened to six monthsfrom the end of a financial year forcompanies listed on an EU market oncechanges to the Transparency Directiveare implemented (see below: ListedCompanies – Changes to theTransparency Directive).

Content of the ReportBIS has indicated in its consultation that itdoes not intend to mandate a specificreporting format but will develop industryguidance and a recommended templatefor reporting in on-going consultation withindustry representatives. A possiblereporting template – in the form of twotables: payments by country andpayments by project – is provided as anannex to the consultation document.

Place of publicationUK companies will be required to file theirreports with UK Companies House withinthe applicable timeframe. It is anticipatedthat reports should be filed electronically,and Companies House will determine therules for delivery and filing fees payable indue course. Reports will be madepublicly available on the CompaniesHouse website.

Penalties for failure to complyBIS proposes to penalise non-compliancewith the new reporting requirementsunder the established UK penalty regimeapplicable to other statutory reportingobligations. As such, failure to prepareand/or file a report will be a criminaloffence for directors and failure to delivera report will give rise to civil penalties fora company.

Listed Companies –Changes to theTransparency DirectiveRelated changes to the TransparencyDirective will extend these new disclosurerequirements to companies in extractiveindustries (and forestry) whose securitiesare listed in EU markets, whether or notthat company is incorporated in an EUMember State. These companies mustpublish their reports on payments togovernments within six months of theend of their financial year – that is, twomonths after the deadline for publishingtheir annual financial statements – andkeep their reports publicly available for atleast ten years.

The changes to the TransparencyDirective do not need to be implementedby EU Member States until the laterdeadline of 27 November 2015. In theUK, HM Treasury (and not BIS) will makeproposals for the implementation of thesechanges in due course.

Under the BIS proposals, while only theRegulations are in force and before thechanges to the Transparency Directivehave been implemented, a listedcompany registered in the UK will have

11 months in which to report. In practice,listed companies may find it is simpler tocollect the necessary information as partof their usual financial reporting cycle andas a result we may see a number ofcompanies reporting ahead of thisdeadline.

For a copy of the BIS consultation, see:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/299454/bis-14-622-uk-implementation-of-the-eu-accounting-directive-chapter-10-extractive-industries-reporting-consultation.pdf

Notice of strikingoff may be givenby emailFollowing the Companies (Striking Off)(Electronic Communications) Order 2014coming into force on 11 July 2014,communications in relation to the strikingoff of a company can now be sent by theRegistrar of Companies in electronicform. Previously any suchcommunications had to be sent by post.Analogous legislative changes have beenmade in relation to limited liabilitypartnerships.

Use of communications will not howeverbe mandatory and companies and LLPSwill need to stipulate that electroniccommunication is their preferred methodof receiving information from the Registrarand will need to ensure that their emailaddress for such communication remainsup to date.


https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/299454/bis-14-622-uk-implementation-of-the-eu-accounting-directive-chapter-10-extractive-industries-reporting-consultation.pdf






6 Corporate Update

On the horizon – European Commission proposal to amend the Shareholder Rights DirectiveIn April 2014, the Commission published a proposal to amend the EU Shareholder Rights Directive (2007/36/EC). This Directive was firstadopted back in July 2007, with the aim of improving corporate governance in relation to EU companies with shares admitted to tradingon regulated markets.

The Commission’s proposals include provisions that will require listed companies to:

n publish detailed information on their directors’ remuneration policy. The policy must be approved by the shareholders of the companyat least every three years and once approved, payments to directors outside of the limits of the policy will not be permitted (subjectto very limited exceptions); and

n seek prior shareholder approval for related party transactions representing more than 5% of the company’s assets or transactionswhich can have a significant impact on profits or turnover. Smaller related party transactions representing more than 1% (but lessthan 5%) of assets must be publicly announced on conclusion and be accompanied by a report from a third party assessing whetheror not the transaction has been conducted on market terms and confirming that it is fair and reasonable from the perspective ofshareholders.

The above provisions should not have significant implications for UK premium listed companies who are already subject to similar legaland regulatory requirements. The Directive, if implemented in its current form, will however impact on UK standard listed issuers who arenot currently subject to the related party transaction rules set out in the Listing Rules.

The proposed Directive contains additional proposals that will impact on intermediaries2, proxy advisors and institutional investors andasset managers. In particular:

n intermediaries will be required to offer companies the right to have their shareholders identified and must facilitate the exercise byshareholders of their rights to participate and vote in general meetings;

n proxy advisers will be required to adopt and implement measures to guarantee that their voting recommendations are accurate andreliable and not affected by any existing or potential conflict of interest or business relationship; and

n institutional investors and asset managers will be required to adopt policies on shareholder engagement and to report, on a complyor explain basis, their adherence to such policies.

The proposals are making their way through the European legislative procedure. If the proposals eventually become law, it is proposedthat Member States will have 18 months after their entry into force to implement the changes. As these proposals progress and the formof them is crystallised, we will update you on their potential implications.

2 Defined as a legal person that has a registered office, central administration or principal place of business in the EU and maintains securities accounts for clients.


Corporate Update 7

Court of Appealoverturns decision inEclairs Group case –directors did not usetheir powers for animproper purposeThe Court of Appeal3 has overturned a firstinstance decision that the directors of acompany had used their powers for animproper purpose in imposingvoting/transfer restrictions on twosignificant shareholders of the companyand that the exercise of such power shouldbe set aside. In a majority decision, theCourt of Appeal held that where a recipientof a section 793 Companies Act 2006notice, requiring him to disclose informationabout his interest in shares, chooses not torespond truthfully, then it is this choicewhich is responsible for any restrictionnotice being placed upon him, not anyimproper use of a power of the board ofdirectors.

First instance decisionIn the January 2014 edition of CorporateUpdate we examined the case of EclairsGroup Limited & Glengary OverseasLimited v JKX Oil & Gas Plc4, whichconcerned the validity of certain restrictionson voting and transfer imposed by theboard of directors of JKX under its articleson shares beneficially (though not legally)owned by two significant shareholders,Eclairs and Glengary. At first instance, theCourt held that the board had reasonablecause to believe that the informationprovided by Eclairs and Glengary inresponse to the s.793 notices was false ormaterially inaccurate and, therefore, theboard had the power to impose the

restrictions. However, in the Court’s viewthe only permissible purpose of imposingthe restrictions was to extract informationand as the board had imposed therestrictions primarily to restrict Eclairs andGlengary from exercising their voting rightsat the AGM, it held that the board hadused its power for an improper purpose.Accordingly, the exercise of the power wasset aside.

Majority view of the Court ofAppealThe Court of Appeal held that the misuseof power doctrine was not really relevant inthese circumstances. They drew adistinction between other cases where ithad been held that the directors had usedtheir powers for an improper purpose, onthe basis that the powers in those caseswere unilateral powers of the board andthe “victim” had no choice. By contrast, inthis case, the “victim” of a restriction noticecould easily prevent it being imposed bytelling the truth, or once imposed could getthe restrictions lifted by doing so.Accordingly, the view of the majority of theCourt of Appeal was that a party whochooses not to respond properly andtruthfully to a s.793 notice and, as aconsequence, becomes subject to arestriction notice is a victim of his ownchoice, not a victim of any improper use ofa power of the directors.

The Court went on to support itsconclusion by considering the reasonsbehind both the articles and the statutoryregime (contained in Part 22 of theCompanies Act 2006). The Court notedthat the Companies Act does not specifythat the restrictions can only be imposedfor a particular purpose, and thought itunlikely that Parliament would haveintended there to have to be a detailedinquiry into the minds of the directors

before the sanction was imposed: it wasfar more likely that Parliament intended thatthe sanction could be imposed simplywhere no information or incorrectinformation had been given. The judgeswere also of the view that if directors wereprevented from using the provisions wheretheir predominant purpose was to preventthe relevant shares from being voted, thiswould prevent them being used in exactlythe circumstances in which they were mostlikely to be relevant. In the present case,they viewed the actions of the directors inseeking to find out what the mutual plansof two of its largest beneficial shareholderswere as being exactly the sort of thing thatthe board of any well-run public companyought to be able to find out and somethingwhich other shareholders would want toknow, and which the policy behind boththe articles and statutory regime –transparency – was aimed at.

Beware the law onpenalty clausesIn Talal El Makdessi v CavendishSquare Holdings BV5, the Court ofAppeal unanimously held that clauses in asale and purchase agreement providing

Case Law Update

Editor Comment:The decision of the majority of theCourt of Appeal – being on the side ofthe directors of a company seeking torestrict a shareholder’s ability to voteshares where requested informationhas not been forthcoming – will bewelcome news to company boards. Itis also consistent with the currentGovernment’s agenda of seeking toincrease transparency around thebeneficial ownership of all companies –see the Company Law Update above.

3 JKX Oil & Gas Plc and others v Eclairs Group Ltd & Glengary Overseas Ltd [2014] EWCA Civ 6404 [2013] EWHC 2631 (Ch)5 [2013] EWCA Civ 1539


8 Corporate Update

that the final instalment(s) of theconsideration were not payable to the sellerand triggering the buyer’s ability to exercisea call option over the seller’s remainingshares at a reduced price if there was abreach of certain restrictive covenants werepenalties and therefore unenforceable.

BackgroundMr Makdessi (M), together with MrGhossoub (G) held 87.4% of the shares inTeam Y&R Holdings Hong Kong Ltd (the“Company”). The remaining shares wereheld by a company in the WPP group. InFebruary 2008, M and G sold 47.4% of theshares in the Company to WPP and put inplace put and call options over theremaining 40% of the shares. Accordingly,Cavendish Square Holdings B.V.(“Cavendish”), a holding company withinthe WPP group, held 60% of the sharesand M and G held 40% of the shares.

The key clausesThe sale and purchase agreementcontained extensive restrictive covenantspreventing the sellers, M and G, fromcompeting with the business of the group.If either M or G breached any of therestrictive covenants in any respect, (i) hewould not be entitled to receive anyoutstanding instalment of the consideration(clause 5.1) and (ii) Cavendish couldexercise a call option and acquire therelevant seller’s shares at a price based onnet asset value (i.e. excluding any amountfor goodwill) (clause 5.6). The exercise ofthe call option would prevent the relevantseller from being able to exercise its putoption in the future, pursuant to which theseller’s shares would be sold at a pricewhich included goodwill.

After the sale, WPP claimed that M hadbreached the restrictive covenants andsought to rely on clauses 5.1 and 5.6. Atfirst instance, the judge held that the

clauses were not penalties and wereenforceable. M appealed arguing that theywere penal and unenforceable; in particularbecause their effect was to deprive him ofup to US$115 million in circumstanceswhere WPP had suffered no lossrecoverable at law (because Cavendish’sloss as shareholder was merely reflective ofthe loss of the Company and as such wasirrecoverable). WPP argued that theclauses were commercially justified andthat their predominant purpose was toadjust the consideration and de-couple theparties, rather than to deter breach.

The judgment The Court first considered whether theclauses were a genuine pre-estimate ofCavendish’s loss. In doing so, it questionedwhether there was a substantialdiscrepancy between the level of damagestipulated in the contract and the level ofdamages likely to be suffered. The Courtfound that at the time the agreement wasentered into Cavendish’s loss for breach ofthe restrictive covenants was likely to bezero as its loss would be the loss of valueto its shareholding and thus reflective of theloss suffered by the Company itself.However, at the time the agreement wasentered into the sums that might bewithheld from M under clause 5.1 could beanything from zero to over US$44 millionand therefore extravagant in comparisonwith the loss that might be suffered byCavendish.

Other factors which pointed towardsclause 5.1 being a penalty included thefact that there was no proportionaterelationship between the breach and theamount withheld and that the range of losswhich could be suffered from a breach ofthe covenants was very large. Similarconsiderations applied to clause 5.6.Accordingly, the Court held that theclauses, taken in the context of the

agreement as a whole, were not genuinepre-estimates of loss and were extravagantand unreasonable.

The Court went on to consider whetherthere was a commercial justification for theclauses which might mean that they werenot penal. Cavendish argued that theclauses were part of a commercial bargain,reached after extensive negotiation, as tothe price at which shares in the Companywere to change hands. Clause 5.1 shouldnot be regarded as a pre-estimate of lossbut as expressing what Cavendish wasprepared to pay.

The Court rejected these arguments statingthat the underlying rationale of the doctrineof penalties is that the Court will grant reliefagainst the enforcement of provisions forpayment in the event of breach, where theamount to be paid or lost is out of allproportion to the loss attributable to thebreach and, in that event, such provisionsare likely to be regarded as penal becausetheir function is to act as a deterrent. In theCourt’s view the payment terms ofclauses 5.1 and 5.6 did not fulfil a justifiablecommercial or economic function on thebasis that their effect was such that M waslikely to forfeit sums in tens of millions incircumstances where Cavendish wasprecluded by law from recovering anythingat all. Such forfeiture would happen on theoccurrence of the first, not necessarilymaterial, breach of any one of the relevantprovisions, where the range of activitieswhich might amount to breach and theirpossible consequences was likely to bevery wide and to fall into differentcategories of seriousness, many of whichcould not attract compensation anywherenear the value of what M would forfeit orlose. The Court held that the provisions inquestion went beyond compensation andinto the territory of deterrence.


Corporate Update 9

Court of Appealconsiderscircumstances inwhich terms may beimplied into acontractThe recent case of Marks and Spencerplc (“M”) v BNP Paribas SecuritiesServices Trust Company (Jersey)Limited (“BNP”)6 considered the test forimplying terms into a contract. The Courtof Appeal sought to reconcile two differenttests previously promulgated by the Courts– the objective reasonableness approachand the requirement of necessity. Thedecision suggests that in order for theCourt to imply a term into an agreement,the term must be necessary to achieve theparties’ express agreement, purposivelyconstrued against the admissiblebackground.

The factsM and BNP were parties to a lease. Mexercised a break clause in the leaseentitling it to terminate the lease early and,on doing so, sought to recover a refundfrom BNP of rent, a car parking fee andinsurance charges paid in advance andwhich related to the period followingexercise of the break clause. There was noexpress provision to this effect but, at firstinstance, the judge held that a term shouldbe implied into the lease entitling M torecover those sums. BNP appealed thisdecision.

The test for implying termsThe Court of Appeal acknowledged thatthe judge at first instance was correct toapply the test laid down in the PrivyCouncil case of A.G of Belize v BelizeTelecom7 that for a term to be implied intoa contract, it should spell out in expresswords what the contract, read against therelevant background, would reasonably beunderstood to mean.

The Court of Appeal however went on toconsider caselaw subsequent to the Belizecase, including the case of MediterraneanSalvage v Seamar Trading8 where it washeld that it was not possible to imply a termas a matter of interpretation following theBelize approach unless it is necessary thatthe agreement should contain such a termin order to achieve the parties’ expressagreement, purposively construed againstthe admissible background. The Court ofAppeal was of the view that a party doesnot show that a term is unnecessary simplyby showing that the party’s agreementcould work without the implied term.

The judgmentIn overturning the decision at first instance,the Court of Appeal held it would havebeen obvious to the parties before theysigned up to the lease that there was apossibility that rent would have to be paid infull for a period which went beyond thebreak date and that they must have hadsome discussions about what was tohappen on termination by operation of thebreak clause because other clauses in thelease dealt with certain other consequencesof termination. As a result, the Court did notfind grounds upon which to imply into thecontract a term that rent should berefunded in circumstances where the leasewas terminated early.

Editor Comment:The Makdessi decision highlights the importance of remembering that the law ofpenalties can apply to a wide range of clauses that might not at first appear to betypical penalty clauses (such as good leaver/bad leaver provisions in private equityarticles or forced share transfer provisions in joint venture agreements). Whennegotiating and drafting provisions of this nature, it is important to consider whetherthere is an alternative means of achieving the same result – for example, by makingpayment conditional upon certain events not happening, rather than withholdingpayment for breach. If this is not possible, then consideration should be given tominimising the factors that would indicate the clause is penal, for example, by providingthat the clause is only triggered by a material breach, by making the effect of the clauseproportionate to the breach and/or by making sure the clause does not cover differenttypes of breach or different magnitudes of loss. In this case considerable emphasis wasplaced by Cavendish on the fact that the sale and purchase agreement had beenheavily negotiated by experienced lawyers and that it represented a bargain freelyentered into by the parties. What is clear from this decision is however that, in the caseof penalty clauses, such arguments may carry little weight.

Editor Comment:The case highlights the difficulties inattempting to argue that a term shouldbe implied into a contract. The Court’sstarting point is that if a term has beenagreed upon by the parties then itwould have been included as anexpress term. This decision acts as areminder that taking time at the outsetto consider and document alleventualities is time well spent.

6 [2014] EWCA Civ 6037 [2009] 1 WLR 19888 [2009] EWCA Civ 531


10 Corporate Update

Listing Rulechanges affectingpremium listedcompanies withcontrollingshareholders Changes to the Listing Rules affectingpremium listed companies with acontrolling shareholder came into effecton 16 May 2014. Companies affected bythese changes will need to take action toensure compliance with the newrequirements.

The principal Listing Rule changes thatwill affect companies with a premiumlisting are as follows:

Independent business test A company seeking a premium listing willneed to demonstrate that it will becarrying on an independent business asits main activity (“independent businessrequirement”). Existing premium listedcompanies will need to comply with theindependent business requirement on anongoing basis.

Requirementfor a controllingshareholder agreementAs part of the independent businessrequirement, a company seeking apremium listing must put in place awritten and legally binding agreementwith its controlling shareholder(s). Existingpremium listed companies must ensure arelevant agreement is put in place withany controlling shareholder.

The agreement must containundertakings (the “independenceprovisions”) that:

n transactions and arrangementsbetween the controlling shareholder(and/or any of its associates) and thecompany will be conducted at arm’slength and on normalcommercial terms;

n neither the controlling shareholder norany of its associates will take any

action that would have the affect ofpreventing the company fromcomplying with its obligations underthe Listing Rules; and

n neither the controlling shareholder norany of its associates will propose orprocure the proposal of a shareholderresolution which is intended (orappears to be intended) to circumventthe proper application of theListing Rules.

Regulatory UpdateWho is a controlling shareholder?Any person who exercises or controls on their own or together with any persons withwhom they are acting in concert, 30% or more of the votes of the company.

The FCA has declined to provide any guidance on what the term “acting in concert”means. Companies and their advisers are expected to conduct their own analysis ofwhether parties are acting in concert, including any view taken by the TakeoverPanel9. On the basis that it does not wish to fetter its own discretion, the FCA hastaken an active decision not to incorporate the Panel’s guidance on when parties willbe deemed to be acting in concert. However, the FCA acknowledges that it isunlikely that its analysis and determination of the situations when parties are acting inconcert will differ from the Panel’s conclusions.

9 The Takeover Code defines persons acting in concert as persons who, pursuant to an agreement or understanding (whether formal or informal), co-operate to obtain orconsolidate control of a company or to frustrate the successful outcome of an offer for a company. The Code contains additional guidance as to how this definition shouldbe interpreted.


Corporate Update 11

Failure to complywith independenceprovisions in controllingshareholder agreementA new continuing obligation will require apremium listed company to notify the FCAwithout delay if it no longer complies withthe independence provisions set out in thecontrolling shareholder agreement, or if itbecomes aware that the controllingshareholder is not complying with theindependence provisions in thatagreement.

New annualreporting requirementsThe company’s annual report will also needto contain a statement by the boardconfirming that, where required, thecompany has entered into a controllingshareholder agreement. Where no suchagreement has been entered into, theannual report will need to contain astatement that the FCA has been notifiedof the non-compliance, together with abrief description of the reasons for thecompany’s failure to enter into such anagreement. The board will also need toconfirm that the independence provisionsin the agreement have been complied with

or, if this is not the case, a description ofthe reasons for non-compliance and astatement that the FCA has been dulynotified of it. Where any of the company’sindependent directors decline to supportany of the relevant statements then thismust be stated in the annual report.

Where (i) a company is not in compliancewith the independence provisions set out inthe controlling shareholder agreement, or(ii) the company becomes aware that thecontrolling shareholder is not complyingwith such provisions, or (iii) anyindependent director fails to support thestatement in relation to such arrangementsrequired to be included in the company’sannual report, then enhanced oversightmeasures will apply whereby the relatedparty transaction provisions in the ListingRules are modified such that alltransactions with the controllingshareholder become subject to priorindependent shareholder approval,regardless of the size of the transactionin question.

Appointment of independentdirectorsFor so long as it has a controllingshareholder, a company with a premium

listing will need to ensure that the electionand re-election of any independent directoris approved by both a simple majority of theshareholders generally of the company whovote, whether in person or by proxy, and asimple majority of the independentshareholders of the company (i.e. excludingthe controlling shareholder) who vote,whether in person or by proxy. If such dualapproval is not obtained then the companycannot propose a further resolution to elector re-elect the proposed independentdirector until 90 days after the date of theoriginal vote. Any such further resolutionmust be voted on within 30 days from theend of that 90 day period but may bepassed by a single simple majority vote ofall of the shareholders of the company (i.e.including the controlling shareholder).

Any circular to shareholders relating to theelection or re-election of an independentdirector must include details of any existingor previous relationship, transaction orarrangement that the proposed director hasor has had with the company, its directors,any controlling shareholder or its associatesor a confirmation that there have been nosuch relationships, transactions orarrangements, along with details of how thecompany determined that the proposed

Action Point: Existing premium listed companies have until 16 November 2014 to ensure that a compliant controlling shareholder agreement isput in place or that current arrangements with a controlling shareholder are amended to comply with the new independenceprovisions. The entering into of an agreement with a controlling shareholder that contains only the mandatory independenceprovisions should not constitute a related party transaction, requiring the approval of the independent shareholders of the companyin general meeting. Companies should note however that if, in putting in place a new agreement or amending any existingarrangements, they intend to grant any rights or benefits to the controlling shareholder, this may constitute a related partytransaction. Any such arrangements would need to be assessed on a case by case basis.

Where a company has more than one controlling shareholder it will need to enter into an agreement with each controllingshareholder unless it reasonably considers, in light of its understanding of the relationship between the relevant controllingshareholders, that one controlling shareholder can procure the compliance of the other controlling shareholders and their associateswith the independence provisions. Where this is the case, the company may enter into a controlling shareholder agreement with therelevant controlling shareholder which contains a procurement obligation on the part of that shareholder in respect of the othercontrolling shareholders and their associates to comply with the independence provisions and the agreement must state the namesof any non-signing controlling shareholders.


12 Corporate Update

director is independent and the process forhis selection.

Where a company acquires a controllingshareholder after 16 May 2014, it will haveuntil the date of its next annual generalmeeting to comply with the new provisionsregarding the appointment of independentdirectors, save where notice of thecompany’s annual general meeting hasalready been given or is given within aperiod of three months from the event thatresulted in the company acquiring thecontrolling shareholder. In this instance, thecompany will have until its following annualgeneral meeting to ensure compliance.

Minority protections on cancellation oflisting

As the protections afforded by a premiumlisting fall away on cancellation of listing, theFCA is giving minority shareholdersadditional voting power in relation to aproposed cancellation of a company’slisting.

If a premium listed company has acontrolling shareholder and wishes to applyfor a cancellation it will have to both:

n obtain the approval of a majority of atleast 75% of the votes attaching tothe shares of those voting on theresolution; and

n gain approval by a simple majority ofthe votes attaching to the shares ofindependent shareholders who voteon the resolution.

Following a takeover, an equivalentrequirement based on acceptances of thetakeover will apply, except that where abidder has acquired or agreed to acquiremore than 80% of the voting rights in thecompany no further approval/acceptancesby independent shareholders would berequired to cancel the premium listing. As aconsequence, where the takeover isimplemented by a scheme of arrangementthen no additional vote will be required inorder to delist the target company.

Similar provisions will also apply where apremium listed company with a controllingshareholder is seeking to transfer from apremium listing (commercial company) to astandard listing.

For further details on the changes to theListing Rules, see our May 2014 briefingavailable at:http://www.cliffordchance.com/briefings/2014/05/listing_rule_changesrelatingtocontrollin.html

Eight things we nowreally know aboutmarket abuseOn 28 May, the UK Upper Tribunal handeddown its long-awaited judgment in relationto the FCA’s case against Ian Hannam formarket abuse. The Financial ConductAuthority (“FCA”) had found, and theUpper Tribunal has now held, that heengaged in market abuse by improperlydisclosing inside information. The FCA isseeking to impose a financial penalty of£450,000, although the Tribunal is yet todetermine the appropriate penalty.

The FCA’s action was based on two emailssent by Mr Hannam in September andOctober 2008 whilst he was advising an oilexploration company. The emails, sent to arepresentative of a potential purchaser,referred to positive exploratory drillingresults and indicated that an offer wouldimminently be made by anotherinterested party.

Mr Hannam had argued that the emails didnot contain inside information and that the

Editor Comment: Premium listed companies will need to examine any existing “relationship” agreementwith any controlling shareholder to ensure that it satisfies the new Listing Rulesrequirements. Where this is not the case, the agreement will need to be amended or,where no such agreement exists, a new agreement put in place. With regard to timing,a compliant agreement needs to be put in place by not later than 16 November 2014.As mentioned above, enhanced oversight measures will apply in circumstances wherethe company is not able to ensure compliance with the independence provisionsrequired to be set out in the controlling shareholder agreement and, in addition, thecompany will need to self report any non-compliance to the FCA.

Companies will also need to review their articles of association to ensure that there isnothing in them that prevents the election of independent directors being conductedin the manner described above. Any necessary amendments to the articles should beput on the agenda as an item to be addressed at the company’s next annual generalmeeting. In addition, companies will also need to ensure that next year’s annualreport contains the necessary controlling shareholder disclosures.

Action Point:Whilst the FCA has confirmed that itdoes not require companies to amendtheir articles to reflect the above votingrequirements, both applicants for apremium listing and existing premiumlisted companies will need to ensurethat their articles do not expresslyprevent the appointment ofindependent directors in this manner.Existing premium listed companieshave from 16 May 2014 until the dateof their next annual general meeting tocomply with this requirement.


http://www.cliffordchance.com/briefings/2014/05/listing_rule_changesrelatingtocontrollin.html



Corporate Update 13

information was, in any event, disclosed inthe proper course of his employment.Although there was no suggestion that MrHannam had intended to commit marketabuse and the Tribunal said that there wasno suggestion that Mr Hannam is not a fitand proper person, the Tribunal held thatthe disclosure could not be considered tohave fallen within the exception of havingbeen made in the proper course ofemployment and therefore did amount tomarket abuse.

The Tribunal’s findings do not break newground. However, the Tribunal consideredthe issues in great detail in a 130 pagejudgment in relation to two short emails. Asa result, the judgment provides someimportant pointers for both companies andtheir advisers involved in handling insideinformation and pre-sounding activities inadvance of transactions.

The confirmation it provides in relationto the meaning of “inside information”(under section 118C of the FinancialServices and Markets Act (“FSMA”)(see box opposite)) will be of particularimportance for companies consideringwhether it is necessary to makeannouncements. Likewise, it provides usefulclarification to advisers and other marketparticipants who must decide whether andhow information can be disclosed andwhether they are free to deal in securitieseven though they have received non-publicinformation.

The Tribunal’s views on what is insideinformation will continue to be importantunder the new EU Market AbuseRegulation, scheduled to replace theexisting UK law in mid-2016. TheRegulation uses similar tests of whatconstitutes inside information and improperdisclosure, although it includes a moreformal set of requirements for marketsoundings by companies and their advisers.

Key lessons1. When will information be “likely to

have a significant effect on price”?Non-public information is inside informationif it would be “likely to have a significanteffect on price”, but section 118C(6) FSMAstates that information is likely to have asignificant effect on price if, and only if, it isinformation of a kind which a reasonableinvestor would be likely to use as part ofthe basis of his investment decisions. Therelationship between these two tests hasbeen an area of fertile and longstandingdebate in the UK and will continue to beimportant under the new EU Market AbuseRegulation scheduled to apply frommid 2016.

However, the FCA accepted that the“reasonable investor” test did notaltogether supplant the test of whether theinformation is “likely to have a significanteffect on price”. The Tribunal held that the“likely to have a significant effect on price”test must be borne in mind in construing ormust inform the meaning of the“reasonable investor” test as thereasonable investor is an investor whowould take into account information whichwould be likely to have a significant effecton price. Conversely, he is an investor whowould not take into account informationwhich would have no effect on price at allor, as the FCA itself argued, informationwhich would have no prospect ofsignificantly affecting the price ofthe investment.

What is “inside information”?“Inside information” is defined for the purposes of the UK civil market abuse regimeby section 118C(2) of FSMA, by reference to particular “qualifying investments” as:

“information of a precise nature which –

a) is not generally available

b) relates, directly or indirectly to one or more issuers of the qualifying investmentsor to one or more of the qualifying investments, and

c) would, if generally available, be likely to have a significant effect on the price ofthe qualifying investments or on the price of related investments”.

Section 118C(5) of FSMA adds:

“Information is precise if it –

a) indicates circumstances that exist or may reasonably be expected to come intoexistence or an event that has occurred or may reasonably be expected tooccur, and

b) is specific enough to enable a conclusion to be drawn as to the possible effectof those circumstances or that event on the price of qualifying investments orrelated investments”.

Section 118C(6) of FSMA further adds:

“Information would be likely to have a significant effect on price if and only if it isinformation of a kind which a reasonable investor would be likely to use as part of thebasis of his investment decisions”.


14 Corporate Update

The Tribunal made clear that the“reasonable investor” will take account ofanything which may have a “non-trivial”effect on price. Just as other courts andtribunals which have considered this issuehave done, the Tribunal stopped short ofseeking to quantify “significant” innumerical terms.

2. Is intent necessary for a finding ofimproper disclosure?

No. It was common ground throughout theproceedings that Mr Hannam did notintend to engage in market abuse. Instead,arguments focused on whether he shouldhave known that the disclosures wouldamount to market abuse.

The FCA has been careful from the outsetof its action not to seek to impugn MrHannam’s honesty and integrity and hasnot taken action under any other provisionsof the Handbook or FSMA. However, thisshould not be seen as an indication that itis softening its line on approved personswho engage in market abuse (whetherdeliberately or otherwise). Other cases(such as the fine of £662,700 andprohibition order imposed on MarkStevenson in March 2014 for marketmanipulation) illustrate its readiness to takeaction using the full array of tools availableto it in this area.

3. Can information be“inside information” even if it is inaccurate?

Yes. The key issue is how information isperceived by the recipient. As in this case,statements containing factual inaccuraciesmay be considered to be accurate by theperson receiving them, and may inform theactions subsequently taken by them. TheTribunal confirmed that, provided aparticular piece of information indicatessome circumstances or events whichactually exist or have occurred or whichmay reasonably be expected to come

about or occur, it may still be sufficientlyprecise to constitute “inside information”even if it contains inaccuracies. TheTribunal also stated that the fact that acommunication, or even a particularsentence, may contain some inaccurateinformation does not prevent otherinformation contained in the samecommunication or sentence from being“inside information” provided “thecorrect facts are still recognisable despitethe inaccuracies”.

4. When is there a “realistic prospect”of circumstances coming intoexistence?

The question of whether there is a “realisticprospect” of circumstances coming intoexistence or events occurring in the futureis important when determining whetherinformation is “precise” and thereforewhether it can constitute “insideinformation”. Adding some colour toexisting European case law and guidance,the Tribunal indicated that there is a“realistic prospect” where that prospect ismore than merely “fanciful”. It declined toquantify the concept in terms ofpercentage chances of circumstances

coming into existence or an eventoccurring, but made clear that the line isdrawn at a relatively low level and that it isnot necessary for it to be more likely thannot. Accordingly, even a less than 50%likelihood of an event occurring can still beconsidered a “realistic prospect”.

5. Is it necessary to know howinformation will affect price?

Yes, although the threshold for informationto be regarded as “specific enough toenable a conclusion to be drawn as to thepossible effect of … facts or circumstancesor [an] event on…price” is also relativelylow. The Tribunal held that it is onlynecessary for an investor to be able toascertain that, if the information were madepublic, the price of the instruments inquestion “might move and, if it [were tomove], the movement will be in a knowndirection”. In other words, it is onlynecessary to know that the informationmay either cause the price to increase orthat it may cause the price to decrease. Itis not necessary to know by how much theprice would change or even for the investorto have a high degree of confidence thatthe price will in fact move.


Corporate Update 15

6. What are the characteristics of the“reasonable investor”?

It is now clearer what the mythical“reasonable investor” looks like. TheTribunal has made clear that the term is notnecessarily synonymous with the typicalinvestor to be found in the market (or inother words “the regular user of themarket”), and that the “reasonable investor”does not necessarily have relevantknowledge of the market in which he isoperating or the instrument in respect ofwhich he is dealing. Instead, a “reasonableinvestor” is assumed to know all publiclyavailable information, and to be a rationaland economically motivated investor withsome experience of investing in companyshares, but not an investment professional.

7. Can you “improperly disclose”information to someone whoalready knows it?

Yes. Reiterating that the focus of“improper disclosure” must be on theactions of the person disclosinginformation rather than the state ofknowledge of the recipient of thatinformation, the Tribunal confirmed thatinformation can be “improperly disclosed”to a recipient who already knows thatinformation from a separate source. Inthis case, information was held to havebeen “disclosed” in emails because itadded materially to information alreadyprovided at previous meetings.

8. Can one act in the client’sbest interests but not “in theproper course of the exerciseof employment, professionor duties”?

Yes. Although it accepted that heintended to act in his client’s bestinterests, the Tribunal held that MrHannam was not acting “in the propercourse of the exercise of his employment,profession or duties” as he did notimpose any confidentiality requirements

on the recipient of the information hedisclosed. Although it did not provide anydetailed indication of the steps to betaken to avoid improper disclosure, theTribunal did express its view that “it couldnever be in the proper course of aperson’s employment for him to discloseinside information to a third party, wherehe knows that his employer and clientwould not consent to the publicdisclosure of that information, unless heknows that the recipient is under a dutyof confidentiality and that he knows thatthe recipient understands that to bethe case”.

European marketabuse legislationprogresses towardsimplementation June 2014 saw the publication of a raft ofnew legislation in the EU Official Journal,marking the start of the period withinwhich Member States have to take stepsto implement the various newrequirements.

The Market Abuse Regulation (RegulationNo. 596/2014 on market abuse) (“MAR”)updates and strengthens the existingframework on market integrity andinvestor protection provided by theexisting Market Abuse Directive(2003/6/EC) (“MAD”) which is to berepealed. The new measures are aimedat ensuring that regulation keeps pacewith developments in technology andmarket practice and will apply from July2016.

MAR will extend the current marketabuse regime to financial instrumentsadmitted to trading on EEA multilateraltrading facilities (“mtfs”) and EEAorganised trading facilities in addition to

EEA regulated markets (unlike MADwhich only applies to instruments tradedon EEA regulated markets). The currentUK market abuse regime is wider thanthe existing EU MAD regime as it appliesto instruments admitted to prescribedmarkets which includes mtfs that arerecognised investment exchange marketse.g. AIM and unlisted ISDX markets.

It is understood that the super-equivalentprovisions in s.118(4) and s.118(8) of theFinancial Services and Market Act 2000(misuse of information and misleadingimpressions/distortion) will lapse at thesame time as MAR takes effect. It seemslikely that EU guidance on MAR willreplace FCA guidance in the Code ofMarket Conduct.

The Directive on Criminal Sanctions forMarket Abuse (Directive 2014/57/EU)complements MAR by providing forharmonised criminal offences of insiderdealing and market manipulation, and theimposition of criminal penalties of not lessthan four and two years imprisonment forthe most serious market abuse offences.Member States implementing itsprovisions (which will not include the UKas it has opted out of the Directive), willhave to make sure that such behaviour,including the manipulation ofbenchmarks, is a criminal offence,punishable with effective sanctions.Member States implementing itsprovisions have two years to transposethem into their national law.

For full details, see our Clifford Chancebriefing.https://onlineservices.cliffordchance.com/online/freeDownload.action?key=OBWIbFgNhLNomwBl%2B33QzdFhRQAhp8D%2BxrIGReI2crGqLnALtlyZe4DHh7FS7sAo4f%2BYyqobPZTp%0D%0A5mt12P8Wnx03DzsaBGwsIB3EVF8XihbSpJa3xHNE7tFeHpEbaeIf&attachmentsize=519079


https://onlineservices.cliffordchance.com/online/freeDownload.action?key=OBWIbFgNhLNomwBl%2B33QzdFhRQAhp8D%2BxrIGReI2crGqLnALtlyZe4DHh7FS7sAo4f%2BYyqobPZTp%0D%0A5mt12P8Wnx03DzsaBGwsIB3EVF8XihbSpJa3xHNE7tFeHpEbaeIf&attachmentsize=519079







16 Corporate Update

ABI publishes bestpracticerecommendations inrelation to lock-upagreementsOn 14 April 2014, the ABI published itsrecommended best practice approach inrelation to lock-up agreements.

Lock-up agreements are often entered intoat the time of an IPO or secondary marketplacing (for example, a rights issue) as amatter of market practice with investorswith significant shareholdings. Under theterms of the lock-up the investor commitsto the company and the underwritingbanks not to dispose of some or all of itsshares for a prescribed period, save in alimited set of circumstances. The widerinvestor community places importance onthe existence of lock-ups as they helpregulate the supply of shares inthe company and so are relevant to priceformation.

Some lock-ups may be waived at the solediscretion of the banks (a “soft lock-up”).Others may only permit the shareholder todispose of shares in a very limited set ofcircumstances for a set period of time (a“hard lock-up”). The ABI has noted that ithad become market practice that,increasingly, lock-ups are being waived bythe banks before the stated expiry dateand views this as an unwelcomedevelopment.

In the recommendations, the ABIdistinguishes between hard and soft lock-ups. In particular, it recommends that:

n both the period of the lock-up and thecircumstances in which any sale maytake place prior to its expiry (inparticular the extent to which anyperiod of the lock-up is “soft” i.e. at thediscretion of the banks) should beclearly disclosed; and

n whilst acknowledging that theappropriate period and terms of a lock-up are a matter for the investor and thebanks and the particular circumstancesof the deal, the ABI notes thatgenerally:

• soft lock-ups are onlyappropriate for periods ofrelatively short duration;

• where the lock-up is of a longerduration, it is appropriate for thelock-up agreement to specify aninitial period of hard lock-up; and

• any waiver at the sole discretion ofthe banks should only be givenafter careful consideration, takingfull account of the overall meritsfrom the perspective of investorsand the need to maintain marketintegrity. The ABI would generallyonly expect any such waiver to begranted at a time close to thestated expiry of the lock-up.

For a copy of the ABI recommendations,seehttps://www.abi.org.uk/~/media/Files/Documents/Publications/Public/2014/investment/ABI%20Position%20on%20Lock%20Up%20Agreement%20April%202014.ashx

Stamp duty andSDRT no longerchargeable ontransactions insecurities admittedto trading on aRecognised GrowthMarket: impact forAIM issuersOn 24 April, the London Stock Exchangeconfirmed that HMRC had granted“Recognised Growth Market” status forAIM and the High Growth Segment, as aresult of which, stamp duty and stampduty reserve tax is no longer chargeable ontransactions in eligible securities admittedto trading on those markets, provided thesecurity in question is not also listed on aRecognised Stock Exchange, such as theMain Market of the London StockExchange. This change came into effect on28 April 2014.

In order to take advantage of this changethe London Stock Exchange requiresissuers on these markets to certify toEuroclear UK & Ireland (“EUI”) that theirsecurities are admitted to trading on AIM orthe High Growth Segment (as applicable)and that they are not also listed on aRecognised Stock Exchange (ifappropriate). If EUI has not received acertification for an eligible security, EUI willcontinue to collect stamp duty reserve taxon transactions in the relevant securities ofthat issuer.


https://www.abi.org.uk/~/media/Files/Documents/Publications/Public/2014/investment/ABI%20Position%20on%20Lock%20Up%20Agreement%20April%202014.ashx




Corporate Update 17

FRC consultation onCorporateGovernance CodeOn 24 April 2014, the FRC published aconsultation document on proposedrevisions to the Corporate GovernanceCode (“Code”) which will apply toreporting years beginning on or after1 October 2014. The consultation buildson two earlier consultations on directors’remuneration (October 2013) and riskmanagement, internal control and thegoing concern basis of accounting(November 2013). As a result of theseearlier consultations, the FRC isproposing that:

n greater emphasis be placed onensuring that remuneration policiesare designed with a view to thelong term success of the company.Responsibility for meeting thisobjective will rest with theremuneration committee;

n companies should put in place“clawback” arrangements to enablethem to recover or withholdvariable pay;

n Schedule A of the Code (The designof performance related remunerationfor executive directors) should beupdated to encourage companiesto review their existing arrangementsfor deferred remuneration, inparticular, vesting and holdingperiods for shares;

n Code Provision C.1.3 should beamended to recommend thatcompanies state in their annual andhalf yearly financial statementswhether they consider it appropriateto adopt the going concern basis ofaccounting and to identify anymaterial uncertainties to their ability to

continue to do so over a period of atleast 12 months from the date ofapproval of such statements;

n Code provision C.2 should beexpanded to recommend that (1) thedirectors confirm in the annual reportthat they have conducted a robustassessment of the company’sprincipal risks and explain how suchrisks are being managed andmitigated (C.2.1); (2) taking accountof the company’s current position andprincipal risks, the directors shouldexplain in the annual report that theyhave assessed the prospects of thecompany, over what period they havedone so and why they consider thatperiod to be appropriate (C.2.2); and(3) the directors should state that theyhave a reasonable expectation thatthe company will be able to continuein operation and meet its liabilities asthey fall due over the period of theirassessment (C.2.3); and

n boards should monitor their riskmanagement and internal controlsystems and, at least annually, carryout a review of their effectiveness and

report to shareholders on the same.

The FRC is also consulting on extractsfrom its proposed merged guidance onrisk and going concern which is intendedto assist companies in applying theproposed revised Code. Full guidance isexpected to be published at the sametime as the revised Code.

The FRC is intending to defer making anychanges to the section of the Codedealing with audit committees and theappointment of the external auditor untilthe Code is next reviewed in 2016. This isto allow time for the Competition andMarkets Authority to finalise its proposalsfor changes to audit services for FTSE350 companies (see the article entitled“Audit Tender – latest position” on page 3for details).

The consultation closed on 27 June2014. A copy of the consultationdocument in available at:https://www.frc.org.uk/OurWork/Publications/CorporateGovernance/Proposed Revisions to theUK Corporate Governance File.pdf

Corporate Governance Update


https://www.frc.org.uk/Our Work/Publications/Corporate Governance/Proposed Revisions to the UK Corporate Governance File.pdf




18 Corporate Update

FRC publishesGuidance on theStrategic ReportThe FRC has published non-mandatory,principles-based guidance for directors thatis intended to serve as best practice for allentities preparing strategic reports.

BackgroundThe Companies Act 2006 was amendedlast year to require a company to prepare astandalone strategic report as part of itsannual report in place of the businessreview which previously formed part of thedirectors’ report. This requirement tookeffect for financial periods ending on orafter 30 September 2013. The overridingobjective of the strategic review is toprovide information to a company’sshareholders to enable them to assesshow the directors have performed theirduty to promote the success of thecompany. In the FRC’s view, it shouldreflect the directors’ views of the companyand provide context for the relatedfinancial statements.

Key focus of the GuidanceThe purpose of the Guidance is to (i)ensure that information relevant toshareholders is presented in the strategicreport, (ii) encourage companies toexperiment and be innovative in thedrafting of their annual reports, presentingnarrative information in a way which bestenables a company to “tell its story” and (iii)promote greater cohesiveness in theannual report through improved linkagebetween the information in the strategicreport and in the rest of the report.

Placement of information,cross referencing andvoluntary informationThe FRC notes that the Companies Act2006 envisages each of the componentparts of the annual report (e.g. the strategicreport, remuneration report, directors’report, corporate governance report andfinancial statements) to be separatelyidentifiable parts of the annual report andtherefore, it follows that informationrequired to meet the requirements of thestrategic report should generally be placedin a separate section constituting thestrategic report.

However, the FRC acknowledges that, incertain circumstances, it may be helpful togroup together similar or related disclosuresarising from legal or regulatory requirementsthat apply to different component parts ofthe annual report, in order to reduceduplication and enable linkages to behighlighted. Where information satisfying adisclosure requirement that applies to thestrategic report is present outside of thatreport, then the guidance recommends thatthere should be clear and specificcross referencing.

In the view of the FRC, complementaryinformation not required to be included inthe annual report (i.e. because it is beingdisclosed voluntarily) should generally bepublished separately (e.g. on thecompany’s website). The FRC acceptshowever that the directors may sometimeswish to include some complementaryinformation in the annual report and theguidance suggests such information couldbe included either in a separate non-statutory section of the annual report or inthe directors’ report. Signposting shouldthen be used to enable shareholders to findcomplementary information which relates toa matter addressed elsewhere in a differentcomponent part of the annual report.


Editor Comment: The changes to Code provision C.2.2 have raised some concerns. The FRC consultation paper appends draft guidance which indicatesthat, except in rare circumstances, the period covered by the disclosure pursuant to C.2.2 should be significantly longer than 12 monthsfrom the approval of the financial statements. Given the difficulties of predicting future uncertain events, there are concerns that thisdisclosure would need to be accompanied by heavily caveated statements from directors and, therefore, this would provide only limitedvalue to investors. However, directors may equally be concerned that a heavily caveated statement may convey an unduly negativemessage to the market which could be reflected in investor sentiment towards the company.

The suggestion in the draft guidance that the disclosure required by C.2 should also set out any significant failings or weaknessesidentified from the risk management review is also of concern. Various respondents to the FRC consultation, including the City ofLondon Law Society and the ICAEW, have raised concerns about requiring companies to make disclosures of this kind on the basisthat they may prejudice a company’s interests. The ICAEW expresses particular concern that, in its view, there is insufficient time toprepare new risk management and going concern guidance by 1 October 2014 if market participants are to be allowed time to reviewand comment on it.

It is unclear how the statement required by C.2.2 will interact with any working capital statement required to be included aprospectus or class 1 circular as the FCA does not permit a company to qualify its working capital statement in any way. It is hopedthat the FRC will work with the FCA on this issue in order that companies and their advisers can understand how these tworequirements will interact with one another.

Corporate Update 19

ICSA RegistrarsGroup publishesguidance note onfacilitation ofelectronic paymentof dividendsIn March 2014, the ICSA Registrars Grouppublished a guidance note on the practicalissues around articles of associationrelating to dividend distributions.

Whilst most companies currently paydividends via cheque or BACS, somecompanies also use CREST and, astechnology develops, the Group believesthat it is important that companies’ articlesof association are flexible enough to enablethem to adopt new payment mechanisms

where it is believed to be desirable to doso without having to revert to shareholdersfor approval on each occasion. As such,the guidance note contains suggestedlanguage10 which companies might wish toconsider using if they feel the need tochange their articles in order to givethemselves flexibility to decide:

n which payment method is used;

n which payment method is to be thedefault method;

n whether or not shareholders may makean election for a distribution methodother than the default or not.

The Group have requested guidance fromthe FCA that any circular explaining suchamendments to the articles would not betreated as a circular containing any“unusual features”, and, as such, wouldnot require FCA approval under the ListingRules. Pending such confirmation, the

Group states that companies and theiradvisers should form their own view onwhether any circular relating to suchchanges would require approval.

A copy of the guidance note can beaccessed here:http://www.capitaassetservices.com/assets/media/ICSA_Guidance_Articles_and_dividends.pdf

Editor Comment:Companies will wish to refer to the FRC Guidance on the Strategic Report when theybegin to prepare their next annual accounts. The comments in the Guidance regardingthe inclusion of voluntary information and cross referencing should, however, be read inthe light of a statement published by BIS at the same time as the Guidance waspublished. In a letter dated 30 April 2014, BIS stated its concerns about the “overlycautious” placing inappropriately large volumes of information, including that not requiredto meet a specific legal requirement, in the strategic report, directors’ report andremuneration report in order to benefit from the “safe harbour” in section 463 of theCompanies Act 2006. If the inclusion of such information manifests itself in a way thatdetracts from clear and concise reporting then BIS states that it may revisit the operationof the safe harbour provision. The Guidance is clear that the inclusion of immaterialinformation should be avoided. Companies will need to give detailed consideration as tothe extent of any disclosures required to meet the specific disclosure requirements of thestrategic report.

With regard to cross referencing, BIS is of the view that information incorporated bycross referencing into any of the strategic report, directors’ report or remuneration report(i.e. one of the reports benefiting from the safe harbour) from other parts of the annualreport and where this is necessary to meet the requirements of any of those reports, will be covered by the safe harbour provision.Information placed outside of the annual report, for example on the company’s website, even where cross referenced to it in theannual report, will not however benefit from the safe harbour.

The Guidance replaces the Accounting Standards’ Reporting Statement: Operating and Financial Review and is intended to bealigned with the requirements of the UK Corporate Governance Code. A copy of the Guidance is availableat: https://www.frc.org.uk/Narrative-Reporting

A “safe harbour”for directorsSection 463 Companies Act 2006provides a safe harbour for directorsfrom liability to compensate thecompany for any loss incurred by it forthe contents of the strategic report,directors’ report and remunerationreport provided that a director (i) doesnot make a deliberately untrue ormisleading statement in any of thesereports, (ii) is not reckless as towhether any such statement ismisleading or untrue, and (iii) does notdishonestly conceal a material fact byway of an omission.

Editor Comment:Given the ever increasing variety ofmeans by which people can now makepayments, such as by way of mobilephone, companies may want to givethemselves greater flexibility in thisregard if their articles do not currentlyprovide this. This looks like one to puton the list of issues to revisit whenconsidering the agenda items for thecompany’s next AGM.

10 Prepared by a joint working party of the City of London Law Society’s Company Law Sub-Committee and the Law Society of England and Wales’ Standing Committee onCompany Law.


https://www.frc.org.uk/Narrative-Reporting

http://www.capitaassetservices.com/assets/media/ICSA_Guidance_Articles_and_dividends.pdf



20 Corporate Update

Women on Boards: progress report publishedOn 26 March 2014, Lord Davies published the third annual progress report into Women on Boards. When Lord Davies firstpublished his review on this issue in 2011, he set a target of 25% of women on all FTSE100 boards by 2015.

The figures show that progress continues to be made with more women than ever before on the boards of the UK’s topcompanies. Key statistics are set out below:

As of 3 March 2014, in the FTSE100 women now account for:

n 20.7% of overall board directorships, up from 17.3% in April 2013. Of this, however, women account for 25.5% of nonexecutive directorships and only 6.9% of executive directorships.

n 28% of all board appointments in 2013/14.

There are no longer any all-male boards in the FTSE100 following Glencore Xstrata’s appointment of a female director in June 2014.

In the FTSE 250 women now account for:

n 15.6% of overall board directorships, up from 13.2% in 2013. Of this, women account for 19.6% of non executive directorshipsand just 5.3% of executive directorships.

n 33% of all board appointments in 2013/14.

There remain 48 all-male boards in the FTSE 250.


Corporate Update 21

Practice StatementNo.27 – Rule 21.2 –Directors’irrevocablecommitments andletters of intentIn January 2014, the Panel Executivepublished Practice Statement No.27reminding parties involved in an offer orpotential offer of the way in which itinterprets and applies Rule 21.2 of theTakeover Code to irrevocablecommitments and letters of intent given bytarget director shareholders.

Rule 21.2 Under Rule 21.2(a) of the Code, exceptwith the Panel’s consent, neither the targetnor any person acting in concert with it(which includes target directors, who arepresumed to be acting in concert with thecompany) may enter into any “offer-relatedarrangement” with the bidder or its concertparties during an offer period or when anoffer is reasonably in contemplation. An“offer arrangement” is, broadly speaking,anything which might inhibit a competingoffer from being made. Irrevocablecommitments and letters of intent areexcluded from the definition of “offer-relatedarrangements” (Rule 21.2(b)(iv)) providedthey simply deal with accepting the offer.

Although the Panel had previously madeclear how it interprets Rule 21.2 of theCode in relation to irrevocables, asrecently as November 2013, the Panelhad to ask target directors to re-executeirrevocables without the inclusion of anon-solicit undertaking which hadpreviously been included in breach ofRule 21.2 (General Sales and Leasing’s£24.3m bid for Xenetic Biosciences).

Practice Statement No. 27The Executive has reiterated that, althoughRule 21.2(b)(iv) permits a target directorshareholder to enter into an irrevocablecommitment or letter of intent to accept anoffer (or vote in favour of a scheme) inrelation to his shares, the Rule does notpermit such a person to enter into anyother type of offer-related arrangementwith the bidder or the bidder’sconcert parties.

The Executive highlighted that it wouldview the inclusion of any of the followingprovisions in an irrevocable undertakingas breaching Rule 21.2:

n not to solicit a competing offer; torecommend an offer to targetshareholders; and to notify the bidder ifthe director becomes aware of apotential competing bid;

n to convene board meetings and/or votein favour of board resolutions that arerequired to implement the offer;

n to provide information for duediligence or other reasons in relationto the target;

n to assist the bidder to satisfy itsoffer conditions;

n to assist the bidder in preparing theoffer documentation; or

n to conduct the target’s business in aparticular way during the offer period.

The Executive has confirmed that it wouldstill regard these types of commitment tobe in breach of Rule 21.2 even if they werestated to be subject to the director’sfiduciary or statutory duties.

Provisions that are aimed solely at givingeffect to a commitment to accept the offeror vote in favour of the scheme arehowever permitted under Rule 21.2(b)(iv).These could include an undertaking not todispose of the shares or withdrawacceptance of the offer; an undertaking toelect for a particular form of bidconsideration; and/or representations as totitle to the relevant shares.

If there is any doubt over the inclusion of aparticular provision in an irrevocableundertaking or letter of intent to be givenby a concert party of the target, theExecutive should be consulted.

Takeovers Update


22 Corporate Update

Commission adoptsrevised safe harbourrules for minoragreementsThe European Commission hasissued a revised De Minimis Notice(the “Revise Notice”) which sets out therules for assessing whether minoragreements are exempt from the generalprohibition of anticompetitive practiceunder Article 101 of the Treaty on theFunctioning of the European Union.

General prohibitionArticle 101 prohibits agreements betweenundertakings and decisions by associationsof undertakings which have as their objector effect the prevention, restriction ordistortion of competition within thecommon market. However, the EU Courtshave consistently maintained thatagreements with no appreciable effect oncompetition are outside the scope of Article101. First published in 2001, the DeMinimis Notice (the “2001 Notice”) defineswhat the Commission considers not to bean appreciable restriction of competition byreference to market share thresholds andcreates a ‘safe harbour’ for companieswhose market shares do not exceed 10%for agreements between competitors or15% for agreements between non-competitors.

Key changes made by theRevised NoticeThe Revised Notice has made three mainchanges to the 2001 Notice, althoughthere is no substantial departure from theexisting approach and principles:

n in accordance with current EU caselaw,the Revised Notice clarifies that anagreement aimed at restrictingcompetition ‘by object’ cannot be

considered minor and will alwaysconstitute an appreciable restriction ofcompetition in breach of Article 101;

n the Revised Notice states that theCommission will not apply the safeharbour to agreements containing anyrestriction “by object” or those listed as“hardcore” restrictions in current orfuture Commission block exemptionregulations. In contrast, the 2001Notice listed a specific set of ‘byobject’ or ‘hardcore’ restrictionsexcluded from the safe harbour; and

n the Revised Notice no longer containsan explanation of the ‘effect on trade’and instead makes specific referenceto the rule in the Commission’sGuidelines on the effect on trade thatexcuses agreements between partieswith an aggregate market share equal

to or below 5% and an annual turnoverequal to or below €40 million.

The Revised Notice is accompanied by aStaff Working Document. This is aguidance paper describing variouscategories of restrictions of competitionthat are described as restrictions “byobject” or “hardcore”, supplemented byexamples which refer to decisions of theCourt and the Commission. However, thedocument does not prevent theCommission from finding restrictions“by object” that are not identified inthe document.

The Revised Notice and Staff WorkingDocument are available athttp://ec.europa.eu/competition/antitrust/legislation/deminimis.html

Antitrust Update

Editor Comment: The changes to the 2001 Notice are unlikely, in themselves, to make a significantdifference to companies’ antitrust risks or compliance policies. Most categories of “byobject” restriction were already listed in the 2001 Notice and for those that were not,many companies and practitioners had already cautiously assumed that such restrictionswould not benefit from the de minimis safe harbour.

However, the changes could create difficulties for companies in the future, if theCommission and the EU Courts create new (and unpredictable) categories of “ byobject” restriction. There are some examples of this having already happened in recentyears, such as the Commission’s treatment of certain pharmaceutical patent litigationsettlements (so-called “pay-for-delay” agreements) and the Allianz Hungaria judgment ofthe Court of Justice, where a vertical reciprocal supply relationship was found to be anobject restriction following an unusually extensive assessment of the market context.

This concern should not be overstated, however. The Commission’s guidance omitsany description of the Allianz Hungaria object restriction, implying that it views thatjudgment’s implications as being limited to the specific facts of the case. Moreover, in hisrecent opinion in Cartes Bancaires, Advocate General Nils Wahl expressed the view thata “restrictive” and “cautious” approach should be applied to identifying objectrestrictions. In the AG’s view, only conduct that is injurious in character in the light ofexperience and economics, and proven and readily detectable, should be considered torestrict competition by object. Agreements which, in their context, have an ambivalentimpact on the market or have an ancillary restrictive effect necessary to the pursuit of amain objective that is not restrictive of competition should not be considered a restrictionby object. If followed by the Court of Justice, AG Wahl’s approach should reduce the riskthat companies with small market shares face enforcement action in respect ofagreements not previously considered to be object restrictions.


http://ec.europa.eu/competition/antitrust/legislation/deminimis.html

http://ec.europa.eu/competition/antitrust/legislation/deminimis.html

Corporate Update 23

EuropeanCommissionconsults onimproving mergercontrolThe European Commission is consultingon proposals to reform the EU mergercontrol regime. The plans include aneye-catching proposal to extend theCommission’s powers of review toacquisitions of non-controlling stakeswhere there is a competitive link.

The reforms would also make casereferrals between the Commission and EUMember States more effective, and makecertain procedures less onerous (includingexempting review of joint ventures thatoperate only outside the EEA).

While the Commission’s willingness tostreamline its procedures should bewelcomed, businesses will beconcerned at plans to extend theCommission’s powers of review tonon-controlling interests.

ContextThe Commission’s EU Merger Regulationwas last overhauled in 2004, but has beenreviewed twice since (2009 and 2013).

While the Commission considers that thecurrent Merger Regulation is still generallyfit for purpose and contributes to thesmooth running of the internal market,it recognises that there is room forimprovement – singling outnon-controlling stakes and casereferrals as areas ripe for reform.

The Commission has outlined itsproposals in a White Paper andaccompanying documents, and is seeking

views on the plans in a consultationwindow running until 3 October 2014.

Non-controlling interestsThe plans would give the Commissionpower to review acquisitions ofnon-controlling stakes – essentially thosethat allow the exercise of materialinfluence over commercial policy oraccess to commercially sensitiveinformation – even where theshareholding acquired is as low as 5%.

Although the Commission notes that this issimilar to the tests used in the UK,Germany, Austria and several ex-EEAjurisdictions, it is nevertheless aconsiderable widening of theCommission’s remit, and the 5% thresholdis actually lower than that typically appliedin those other jurisdictions.

The proposed requirement for a“competitively significant link” means thatonly minority acquisitions that appear tobe problematic from a competitionperspective need to be notified. This

requires a competitive relationshipbetween the buyer and target, i.e. wherethey are nominally active in the samemarket or in vertically related markets – asurprisingly broad test that could easilybe met by financial buyers with a diverseportfolio of interests, even where thereare no conceivable competition concerns.

Parties to such a deal would be requiredto submit an Information Notice to theCommission. It is not yet clear exactly howmuch detail this would require, but theCommission has already indicated that itshould include transaction structure andsome market share information. Partieswould also be obliged to wait for a period(e.g. three weeks) for the Commission todecide whether a full notification wasrequired (in which case the parties wouldof course still need to prepare the FormCO, pre-notify and wait for theCommission’s formal review to take place).

Case referralsThe Commission also seeks to limit thenumber of cases reviewed by multiple EUMember States. The proposals aredesigned to encourage greater use of theexisting case referral provisions,particularly from Member States up tothe Commission.

For example, the plans would allowparties who qualify for review in three ormore Member States to file in full directlywith the Commission, without having torequest permission first, reducing thepaperwork and time involved under thecurrent system. The proposals also meanthat where one Member State asks theCommission to review a deal, theCommission would automatically takejurisdiction for the whole EEA (unlessanother competent Member Stateobjected), meaning there should be lessscope for multiple parallel – andpotentially divergent – reviews.


Key pointsn The Commission is seeking power

to review certain acquisitions ofminority shareholdings as low as 5%

n Only those minority acquisitionsfeaturing competitive overlapswould be caught

n Nonetheless, for many businessesthis could lead to a markedincrease in filing obligations

n Conversely, all deals with nooverlaps(and non-EEA joint ventures)would be exempted from reviewentirely, which is to be welcomed

n Case referral procedures betweenthe Commission and EU MemberStates would also be streamlined

24 Corporate Update


Editor Comment:The proposed reforms should be welcomed insofar as they alleviate the workload for businesses and streamline existing proceduresand requirements, e.g. making case referral mechanisms more efficient. Exemption from review for non-EEA joint ventures anddeals with no overlaps would be particularly good news for financial investors such as private equity houses.

However, it is already apparent that the plans could produce a number of undesirable effects or fall short of the intended aims.

Increased burden for businessesFor businesses, any extension of the merger control regime to cover non-controlling acquisitions means adding more delay andcost to those deals. By effectively seeking to lower the test for “control” where there is a competitive link, the Commission willrequire businesses to notify it of transactions that currently pass unbothered by merger control.

The proposed additional waiting period (while the Commission decides whether a full Form CO is required) may mean in practicethat parties to time-sensitive deals feel forced to opt for a full Form CO in the first place, increasing the workload for bothbusinesses and the Commission itself.

Effect on case referralsIt is unclear whether all of the Commission’s proposals to make case referrals to and from Member States more effective will hithome. While the changes to make referrals more efficient for parties should be welcomed, the “nudge” style proposal requiringMember States to actively object to the Commission’s automatic seizure of sole jurisdiction in some cases may not have a greateffect where the Member State remains minded to examine the deal itself.

A European Merger AreaThe Commission indicated that its long term aim is to develop a European Merger Area with a single set of rules used by itself andMember States. This would be a step change that would seemingly require unanimous support of national governments andmajority support at the European Parliament, and would be a major departure from the current system of national regulationinformed by, but not necessarily identical to, the EU regime.

Other proposalsThe Commission has also suggested anumber of other simplifying andstreamlining measures, includingexempting entirely from review:

n full-function joint ventures located andoperating outside the EEA with noeffect on EEA markets; and

n deals leading to no “reportablemarkets”, i.e. where there are nohorizontal or vertical overlaps (orat least requiring only anInformation Notice).

The Commission has also stated thatthere should be greater coherence andconvergence with the merger control

rules of EU Member States. Its aim is toenhance cooperation and to avoiddivergent decisions where there areparallel reviews. The Commission makesparticular reference to some national lawsthat allow governments to overrule acompetition authority’s decision on publicinterest grounds (as seen in the UK withthe Lloyds / HBOS merger in 2008).

Corporate Update 25


Private equityliability for EUantitrust finesThe European Commission hasimposed a €37 million fine on GoldmanSachs (“GS”) for antitrust breachescommitted by a portfolio company thatwas formerly owned by its private equityarm, GS Capital Partners (“GSCP”).

The European Commission held GSjointly and severally liable for €37 millionof a fine of €104.6 million imposed onthe Milan-based company Prysmian forits participation in a cartel for submarineand underground power cables.

GS’ liability stems from theCommission’s finding that its privateequity arm, GSCP, owned a controllingstake in Prysmian between 2005 and atleast 2007: part of the period in whichPrysmian was involved in the cartel.

Under EU competition rules, liability foran antitrust breach attaches not to theindividual legal entities that committedthe infringement, but rather to the entire“undertaking” or “economic unit” ofwhich they form part. Following thislogic, the EU courts allow theCommission to hold a parent companyliable for the antitrust infringements of asubsidiary or portfolio company if theparent exerts “decisive influence” overit. In practice, such influence need onlyrelate to the high level strategy andcommercial policy of the portfoliocompany. Consequently, a parentcompany’s liability can be triggeredeven if it had no involvement in, orawareness of, the breach and did not inany way encourage the subsidiary tocommit it – as was the case for GS.

Moreover, such influence is presumedwhere a parent company owns all oralmost all of the subsidiary’s shares.Rebutting that presumption – i.e.proving a negative, that no suchinfluence was ever exercised – isextremely difficult, and no parentcompany has succeeded to date(although the EU courts haveoverturned some decisions in whichthey found the Commission had notproperly considered parents’ argumentsin this respect).

Liabilities that lingerParental liability can arise even if theinfringing portfolio company has beensold. The fact that GSCP no longerowned Prysmian was no obstacle to theCommission fining GS, as it was theowner during part of the period of thealleged breach.

Attributing liability to parent companiesin this way can allow the Commissionto increase the fine that it imposes.

This is partly because the maximumfine that can be imposed by theCommission – 10% of worldwideturnover – will be calculated on thebasis of consolidated group turnover.A finding of parental liability can alsoresult in increased fines in the future, ascompanies that are deemed to be“repeat offenders” (including in respectof breaches committed by otherportfolio companies) are subject to a100% increase in the fine for eachpast breach.

In the Commission’s eyes, imposingparental liability also creates incentivesfor the board and senior managementof a corporate group to drive antitrustcompliance from the top down, whichtends to be more effective.

Piercing the corporate veilThe approach under EU law isreplicated in the national laws of mostEU countries and, in some cases, takenfurther. In the UK, for example, the

Competition and Markets Authority canseek an order prohibiting an individualfrom assuming any board levelresponsibilities for a UK company (evenif not formally appointed as a director), ifit considers that he or she turned ablind eye to cartel conduct within theircorporate group.

By allowing the corporate veil to be soreadily pierced, EU law stands in starkcontrast to that of the US, where parentcompanies are in most cases only liablefor antitrust breaches of their portfoliocompanies if they are deemed not tohave separate corporate existences.The EU approach is not widely followedin other non-EU countries either.However, this is often because theapproach to parental liability has not yetbeen firmly established in thosejurisdictions. When it is, the EU positioncould be influential.

Mitigation strategiesIn principle, there are a number of waysthat a PE house can seek to mitigatethese antitrust risks.

The first and most effective mitigationstrategy is prevention and detection.After all, if portfolio companies are freeof antitrust liabilities, then there isnothing that can be attributed to theirPE parents. Moreover, some antitrustregulators, such as those in the UK, theUS, Australia, Canada and theNetherlands offer discounts on antitrustfines for firms that can show theexistence of a compliance regime whichis not only effective on paper, but alsorigorously implemented.

A theoretical second (but unattractive)strategy would require ensuring thatthere is comprehensive and compellingevidence that the PE house and relatedstaff exercise no commercial, strategic

or operational influence over its portfoliocompanies. In practice, however, thiswill be incompatible with themanagement strategies of many PEhouses (except possibly in relation tominority interests), particularly asarguments relating to the absence ofexercise of “decisive influence” arerarely successful.

Third, contractual structures might beput in place so that in the event of afine on the basis of parental liability, theultimate financial burden rests within theportfolio company and, failing that, theunderlying fund:

n The portfolio company. Fines areimposed jointly and severally on theparent and the infringing company,so if the portfolio company pays theentire fine, the PE house will have noliability. Judicial precedents for howliability should be allocated betweeninfringers and jointly liable parentshave not yet been established(although there are ongoing cases),but a contractual allocation may be

possible. Such a mechanism wouldneed to survive beyond exit by thePE house of its investment in theportfolio company and would stillleave the PE house with a potentialcredit exposure.

n The underlying fund. Most fundswill grant a wide indemnity in favourof the management company and itsgroup provided it has not actednegligently or in breach of any of itsduties. As such, depending on thewording of the indemnity, andassuming the portfolio company hasbeen unable to pay, themanagement company mayultimately seek to recover the lossfrom the fund itself.

However, in certain circumstancesindemnities and other risk-shiftingcontractual mechanisms (such asinsurance) may be unenforceable insome jurisdictions, for publicpolicy reasons.

In addition, the relevance of negligencefor indemnity claims may well lead to a

26 Corporate Update


discussion over the extent to which PEhouses are responsible for ensuring acompliance culture at portfoliocompany level – and whether they havebeen negligent if they fail to do so.Consequently, ensuring that an effectiveantitrust compliance regime is in placehas the benefit of not only reducing therisk of any issues arising in the firstplace, but also helping to ensure thatthe PE house cannot be seen asculpable for the loss, thereby mitigatingrisks not only to its reputation but alsoto its indemnity position under thefund documents.

Finally, there are a number of examplesof portfolio companies that have beensubjected to antitrust fines in respect ofthe period before they were bought by aPE house. While issues of parentalliability will not arise for the PE house, itstill faces a loss of value in its portfoliocompany. This highlights the importance

of a thorough due diligence, andpotential value of antitrust warrantiesand indemnities when buying a newportfolio company.

The Prysmian case also serves as areminder that liability can be incurredafter the disposal of the portfoliocompany. Investors and managers alikewill need to give appropriate

consideration to claw-back and escrowarrangements when devising andnegotiating fund structures andimplementing post-exit distributionstrategies. However, once the fund hasclosed, and monies have beendistributed, a PE house may have littlechoice but to bear the brunt of a fine.

Corporate Update 27


Editor Comment: As with all legislation that seeks to pierce the corporate veil and impose liabilities onparents, groups or controllers, the implementation of antitrust rules is complicated bythe difficulties of applying typical parent/group/controller analyses to the wide rangeof highly sophisticated and bespoke fund structures seen across the industry.Nevertheless, the Commission’s actions against GS show that these complexities willnot deter antitrust regulators from seeking to attribute liability to PE houses.

This is not the first time that the Commission has sought to impose a fine on afinancial investor. Nor does it necessarily represent a new, more aggressive policy ofthe Commission towards PE houses. However, it is a reminder that private equity firmsare not immune from EU antitrust liabilities of their portfolio companies, and thathaving appropriate mitigation strategies in place can be a valuable safeguard.

28 Corporate Update

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This Corporate Update has been produced by the London Corporate Practice and edited by David Pudge.

David specialises in corporate finance, domestic and cross-border M&A (including public takeovers), listedcompany matters and general corporate advisory work.

Recent major transactions include advising Man Group plc on the acquisition of Numeric Holdings LLP; ComoHoldings on the sale of its shareholding in Armani Exchange to Giorgio Armani SpA; Booker Group plc on itsreturn of capital to shareholders by way of a “B” share scheme; and RBS on the sale of its locomotive andelectric passenger train leasing business to Alpha Trains.

David is a member of the City of London Law Society’s Company Law Committee and a contributing author to “A Practitioner’sGuide to the City Code on Takeovers and Mergers”.

If you would like more information about any of the topics covered in this Corporate Update, please email your usual CliffordChance contact ([email protected]) or contact David Pudge on +44 (0)20 7006 1537 or by email [email protected]

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