Welcome to the latest edition of Corporate Update, our fortnightly bulletin offering a two-minute read of the latest developments which we consider relevant to corporate counsel. Please get in touch with your usual contact if you want to explore any of the topics covered in more detail. If you would like to subscribe to this bulletin as a regular email, please click here.
In this issue
News
FRC publishes draft plan for 2023 to 2026
On 16 December 2022, the Financial Reporting Council (FRC) announced the publication of its draft Three Year Plan 2023 to 2026, which sets out its priorities and expected costs for the next three years. The plan’s approach reflects the delay in its transition to become the Audit, Reporting and Governance Authority (ARGA) due to a delay in the anticipated legislation required to create the new body, which is now expected in 2024.
As a result, the FRC has re-prioritised its work to focus on changes it can make using its existing powers and remit – for example, it had recently consulted on a draft Minimum Standard for Audit Committees which can be adopted by FTSE350 companies on a voluntary basis before it becomes mandatory. It was also noted that the Corporate Governance Code will be revised in 2023. A consultation on the plan will run until 27 January 2023.
Legislation
Registration of Overseas Entities (Verification of Provision of Information) (Amendment) Regulations 2022 published
On 21 December 2022, the Registration of Overseas Entities (Verification of Provision of Information) (Amendment) Regulations 2022 were laid before parliament and published alongside an Explanatory Memorandum. The Regulations make amendments to the existing regime implemented under the Economic Crime (Transparency and Enforcement) Act 2022, which provides rules for the verification of information submitted to Companies House on overseas entities. The Regulations set out that certain information will now be excluded from the verification requirement, including information previously verified and submitted in accordance with section 7 of the Act and applications for removal from the register under section 9.
Case Law
Court of Appeal rules on ‘good faith’ clauses in unfair prejudice claims
In this case, the Court of Appeal was asked to determine whether minority shareholders in a company had been unfairly prejudiced when, among other things, two of them were removed from office as directors of the company by the other shareholders. The minority shareholders had argued that the shareholders’ agreement prevented their removal as directors because it comprised a ‘constitutional settlement’ under which they were entrenched as directors. Although there were no express terms of the shareholders’ agreement to that effect, the High Court had, at first instance, decided that a provision in the shareholders' agreement under which the shareholders undertook to each other and to the company that they would at all times act “in good faith” to each other in relation to the matters contained in the agreement imposed a contractual restriction, binding between shareholders, on the right of the majority shareholders to remove directors and held that the minority shareholders were unfairly prejudiced.
The Court of Appeal allowed the appeal and determined that the High Court had interpreted the good faith obligation too widely. Good faith obligations had to be read in context, on a case-by-case basis, and did not imply certain ‘minimum standards’ of conduct in every case. There was nothing in this case which meant a good faith clause could prevent the majority shareholders from removing the directors.
The Court of Appeal also found, contrary to the High Court’s decision, that the shareholders’ agreement did not form part of the company’s constitution for purposes of directors’ duties under section 171 of the Companies Act 2006 (requiring directors to act in accordance with the constitution) by virtue of section 17 the Act. Section 17 would include as part of the company’s constitution any agreement caught under section 29 of the Act but the Court of Appeal held that the shareholders’ agreement is not an agreement within scope of section 29.
Court of Appeal considered Companies Act provisions relating to non-cash consideration for shares in a public company
The Court of Appeal was asked to consider an appeal by one of the shareholders (RSS) in a Malaysian-incorporated company who had, with another shareholder, acquired shares in a new English-incorporated plc (Z plc) by way of a share-for-share exchange. Under section 593 of the Companies Act 2006, English public companies cannot allot shares for non-cash consideration unless they obtain a valuation, subject to certain exemptions. Z plc had not obtained a valuation for the shares and sought to argue that RSS was obliged to pay those shares up in cash and, since he had not done so, was obliged to pay Z plc EUR 84 million for those shares.
The Court of Appeal diverged from the High Court’s approach and ruled that the High Court had decided the case on an incorrect legal basis by applying section 593. The Court of Appeal found that the Malaysian company shareholders had agreed to subscribe for shares in the Z plc on incorporation, and section 593 does not apply to the shares taken by a subscriber on incorporation as there is no "allotment" of such shares to the subscribers under the 2006 Act. Instead, the Court of Appeal determined that section 584, which provides that shares taken by a subscriber on incorporation must be paid up in cash, applied. RSS was therefore required to pay for the shares in cash.
Dividend declared and used to reduce directors’ loan account retrospectively was a lawful distribution
In this case, the High Court considered the lawfulness of a declaration by a company's only directors and shareholders of a dividend that was back-dated to 31 July 2015 and used to reduce the directors' loan account recorded in the 2014-15 accounts. The amount had not been entered into the company's accounting system until 10 months later (April 2017) when the company was at risk of insolvency. The Court (Tindal J) held that the dividend amounted to a distribution under the Companies Act 2006 dated as on the date the directors declared the dividend (July 2016), and that the distribution had been lawful.
In legal terms, the individuals involved, who were both the only directors and shareholders of the company, had declared an interim dividend, as it is recorded in the accounts, then 'agreed with themselves' (in their capacity as shareholders) that that 'dividend' would be 'paid' into their directors' loan account. It was either an 'agreed means of payment' or a 'non-cash distribution' under the company’s articles, but even if it was neither, the ‘set-off’ of the dividend against the directors' loan account was a 'distribution' under section 829 of the Companies Act 2006 of the company’s non-cash assets to its members, who used it to reduce their debt as directors.
Publications
‘Listed Companies: What to Expect in 2023 – Part 1’
Slaughter and May has published the first part of two briefings looking at developments anticipated this year that will affect the rules and expectations around companies listed in the UK. This first part focuses on equity capital markets, London listings, improvements to the secondary fundraising process and non-pre-emptive share issues.
