Welcome to the latest edition of Corporate Update, our fortnightly bulletin offering a five-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 updated UK Corporate Governance Code
On 22 January 2024, the Financial Reporting Council (FRC) announced the publication of an updated version of its UK Corporate Governance Code as well as a Feedback Statement setting out the background to, and reasons for, the revisions to the Code.
The FRC states that the amendments represent a “target approach” with changes kept “to the minimum that are necessary” and emphasised the flexibility of “comply or explain” reporting. Priority has been given to revisions relating to internal controls with other minor changes aimed at better streamlining expectations or clarifying the language. The FRC has also published a document summarising the key changes to the Code, which includes the timeline for implementation. Changes include:
- asking boards to make disclosures relating to the effectiveness of internal controls (extended to include reporting as well as financial, operational and compliance controls) including a declaration in relation to their material internal controls as at the balance sheet date (Provision 29). Principle O has also been amended to refer to the board’s responsibility for maintaining, as well as establishing, the risk management and internal controls framework);
- a new Principle C encouraging companies to report on outcomes;
- various amendments relating to the FRC’s Audit Committees and the External Audit: Minimum Standard, including in order to remove duplication;
- amendments relating to malus and clawback, including new disclosure requirements; and
- various other amendments including relating to: reporting on departures from the Code; embedding culture; diversity and inclusion; and board evaluations (now board performance reviews).
The updated Code applies to financial years beginning on or after 1 January 2025, with the exception of the changes to Provision 29. The changes to Provision 29 (which relate to the effectiveness of the risk management and internal control framework) apply to financial years beginning on or after 1 January 2026, in order to give companies more time to prepare for these changes.
The “Technical Q&A” section at the bottom of the FRC webpage on the Code has been updated to provide guidance on certain aspects of the new Code (including some guidance relating to internal controls), although the FRC will publish more detailed updated guidance associated with the Code on 29 January.
PERG publishes Annual Report and latest Good Practice Reporting Guide
On 18 January, the Private Equity Reporting Group (PERG) published its 2023 Annual Report and its updated guide on good practice reporting by portfolio companies. This latest version of the guide provides several examples of what would be considered “excellent practice” by portfolio companies.
Some key findings of the Report include:
- Only 60% of the companies surveyed included the required statement of compliance with the Guidelines. This statement is viewed as a proxy for the “fair, balanced and understandable” requirement under the UK Corporate Governance Code.
- In 2023 there was an increase in narrative reporting, with increased disclosure in relation to portfolio companies’ financial position, business strategy and employees. This trend appears to stem from the “uncertain and volatile macroeconomic environment, legacy Covid-19 pandemic issues and the high rate of inflation”. This increase in such reporting is encouraging as businesses try to navigate the current uncertain economic environment.
- There continues to be non-compliance with those disclosures that are specific to the Guidelines, particularly social, community and human rights issues, and gender diversity information.
- The standard of compliance with non-financial key performance deteriorated. In particular, portfolio companies were not explicitly disclosing their non-financial KPIs and leaving it up to the readers to deduce what management considers to be ‘key’.
UK signs Hague 2019 Convention
On 12 January 2024, the UK signed the Hague Convention of 2 July 2019 on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters. The Convention is intended to provide a global framework for the recognition and enforcement of judgments from one contracting state to another, by requiring contracting states to recognise and enforce civil and commercial judgments within its scope. The Convention is expected to come into force 12 months after ratification and it will apply to judgments in proceedings that started after that date. The Convention has 29 signatory states: the 27 members of the EU, the EU, and Ukraine.
Legislation
Economic Crime and Corporate Transparency Act 2023 draft regulations published
On 18 January 2024, two draft Regulations were published and laid before Parliament under powers conferred on the executive by the Economic Crime and Corporate Transparency Act 2023 (“ECCTA 2023”): The Registrar (Annotation, Removal and Disclosure Restrictions) Regulations 2024 and The Register of Overseas Entities (Annotation and Removal) Regulations 2024.
Broadly, the Regulations confer powers on Companies House, in relation to companies and LLPs and overseas entities respectively, to: (i) annotate the companies register or register of overseas entities with information that may confuse where material that was previously considered to be part of the register is no longer considered to do so; and (ii) remove material from the registers accepted for registration despite not meeting the requirements for proper delivery. The Regulations also establish the process by which the registrar will be able to remove material from those registers.
Part 5 of The Registrar (Annotation, Removal and Disclosure Restrictions) Regulations 2024 also includes provisions preventing Companies House from disclosing sensitive information about a person with significant control to a credit reference agency where that person has obtained the necessary protection over that information.
Case Law
High Court finds that a limitation of liability clause in a research agreement was effective to limit liability for dishonest breach
The High Court held that, as a matter of construction, clauses in a research agreement excluding and limiting liability were effective to limit certain losses caused by a fraudulent (or dishonest) breach of contract that was not involving a representation.
The claimant had alleged that it suffered loss in excess of £1 million as a result an academic research paper published by the defendant university which was alleged to be both erroneous and the product of dishonesty on the part of the project’s lead scientist. The research was conducted pursuant to a research agreement between the claimant and the defendant and contained a clause excluding the defendant's liability for loss of profits and other specified losses, including losses arising "because of any representation (unless fraudulent)", and limiting liability that stemmed from "any error or omission (except in the case of […] fraudulent misrepresentation)" to £1 million. In construing the clause, the judge placed significance on the express carve-outs for fraudulent misrepresentation and concluded that the clause excluded loss of profits caused by fraudulent (dishonest) breach of contract.
The High Court also found that the clauses excluding and limiting liability were reasonable under section 11 of the Unfair Contract Terms Act 1977. The judge took into account that the contract was negotiated by lawyers and the university was taking on significant liability, but for the limitation on liability clauses, in respect of a modest fee.
High Court considers how to deal with scheme shares held by a sanctioned shareholder
The case concerned a scheme of arrangement under Part 26 of the Companies Act 2006 to implement the acquisition of the entire share capital of Velocys plc. A sanctioned individual, David Davidovich, held 8.3% of shares in the company subject to the scheme. Velocys plc had applied, and was waiting, for a license from HM Treasury’s Office of Financial Sanctions Implementation (OFSI) to deal in Davidovich’s shares to the extent reasonably necessary to enable them to be transferred to the bidder via the scheme; and to pay the purchase price of said shares into a frozen account at a UK financial institution.
The issues were considered at convening stage and the Court approved an Order convening the scheme meeting on the following terms:
- power was given to the chair of the scheme meeting to disallow any vote purportedly cast by a scheme shareholder, upon receiving advice that it would be unlawful for that vote to be cast (this is without prejudice to a scheme shareholder’s right to assert at the sanction hearing that their votes ought to have been accepted); and
- the terms of the scheme shall contain a condition restricting the transfer of the scheme shares held by a "Sanctions Disqualified Shareholder" until either the effective date of the scheme, or if later, the date on which the OFSI licence is obtained (assuming Davidovich is still subject to sanctions).
The High Court also found that Davidovich’s position did not fracture the overall class of shareholders, thus requiring a second a separate meeting, notwithstanding the fact he was unable to vote and that he would not receive payment in respect of the transfer of shares at the same time as the other scheme shareholders.
Court of Appeal decides that non-assignment provision did not prevent transfer by operation of law
The matter concerned the non-assignment provision in a sale contract for the sale of two aircraft by Dassault to MBA, which was governed by English law. The aircraft were then sold on to the Japanese Coast Guard under a sub-sale agreement governed by Japanese law. MBA had entered into a contract of insurance with MSI to insure the risk of it (MBA) being held liable to the Japanese Coast Guard for late delivery of the aircraft. The aircraft were indeed delivered late and MBA duly claimed against MSI under the insurance contract, and an amount was paid by MSI to the Japanese Coast Guard.
The relevant clause in the sale contract (article 15) prevented any transfer effected by a party to the contract, but it was silent on transfers effected by operation of law. The proper interpretation of the relevant clause arose because Dassault challenged the jurisdiction of the arbitrators in an ICC arbitration in London initiated by MSI against Dassault in mid-2021.
The arbitrators decided, and it was accepted as common ground, that, as a result of the payment made by MSI, MBA's claims against Dassault were transferred to MSI by operation of law under article 25 of the (Japanese) Insurance Act (Act No. 56 of 2008) (article 25) and as such the arbitral tribunal had jurisdiction to deal with MSI’s direct claim against Dassault.
High Court held that the arbitrators had no jurisdiction to decide the dispute on the basis that article 15 (of the sale contract) caught and prohibited the transfer of MBA's claims to MSI under article 25 of the Japanese Insurance Act. The Court of Appeal found that the wording was neither ambiguous or unclear (that is, the clause concerned an assignment or transfer effected by any party, but not by operation of law) and therefore reinstated the arbitral award.
