Corporate law update: 1 - 7 April 2023

In this week's update:

• The High Court interprets the meaning of a warranty that there had been no "material adverse change" in prospects
• The PLSA publishes its Stewardship and Voting Guidelines for 2023
• The Takeover Panel is implementing changes to the Takeover Code following two consultations last year
• The UK Government publishes an updated Green Finance Strategy, including next steps on transition plan and scope 3 emission reporting

Court interprets meaning of "material adverse change" warranty

The High Court has held that sellers of the shares in a company breached a warranty that there had been no material adverse change (MAC) in the company's prospects. In doing so, the court provided valuable guidance on how MAC warranties are likely to be assessed.

Decision Inc Holdings Proprietary Ltd v Garbett [2023] EWHC 588 (Ch) concerned the sale by two individuals of the shares in an IT consulting company to a corporate buyer.

The sellers warranted that "[since] the Accounts Date ... there has been no material adverse change in the turnover, financial position or prospects of the Company".

Following completion, it became clear that the company's prospects were worse than feared. The buyer notified the sellers that there had been a breach of warranties in the SPA, including the forecast warranty above.

The buyer and the sellers subsequently agreed the final figures for the business for the year after completion, which showed a very significant loss.

The buyer brought a claim for breach of warranty. In particular, it alleged that there had been a material change in the company's prospects since its last accounts date, in breach of the warranty above.

In deciding whether the warranty had been breached, the court had to assess how a material adverse change in prospects was to be measured. The judge adopted the following approach:

• Establish the "baseline" position (what had been forecast in terms of prospects when the parties signed the SPA).
• Establish the actual position (what the company's actual prospects were on the date on which the parties signed the SPA).
• Assess whether the difference (if any) is "material".

The court also took the following approach:

• Deciding the "baseline" required an "objective test". The question was what a reasonable buyer and reasonable sellers would have agreed to be the most likely baseline over the period concerned.
• The purpose of comparing baseline and actual figures was to decide whether there had been a change in prospects. This was not the same as calculating the damage (if any) which the buyer has suffered. Calculating damages was a separate exercise, and it was perfectly possible for a comparison to show that there had been a breach of warranty, yet for the buyer not to have suffered any recoverable loss.
• The word "material" is "an ordinary English word, and its application to a set of primary facts is itself a question of fact". In other words, "material" will have a different meaning in each case, depending on the surrounding circumstances.
• In this case, the test was whether the buyer would have entered into the transaction, either at all or on significantly different terms, if it had known about the difference (i.e. the adverse change since the accounts date). Again, this was an objective test based on what a reasonable buyer would have done.

Applying these principles, the court found that there had been a material adverse change and the warranty had been breached.

You can read more about the case in our separate in-depth piece.

PLSA publishes 2023 Stewardship and Voting Guidelines

The Pensions and Lifetime Savings Association (PLSA) has published its stewardship and voting guidelines for 2023.

The key changes to the guidelines since the previous version include the following.

Takeover Panel to implement changes to Takeover Code

The Takeover Panel has confirmed that it will be implementing changes to the Takeover Code following two consultations it launched in October 2022.

Offer timetable in a competitive situation

In the first consultation (PCP 2022/3), the Panel proposed to amend the Code to clarify how an offer timetable would apply in a competitive offer situation where one offeror is proceeding by way of a contractual offer and another offeror proposes to implement a takeover by way of a scheme of arrangement.

In its response statement (RS 2022/3), the Panel has confirmed that it will be proceeding with the amendments proposed in its consultation, subject to very minor modifications. The Panel has published the relevant implementing instrument (2023/1).

The Panel has also confirmed that it will be considering certain comments raised in response to the consultation (where a target board seeks sanction for a scheme of arrangement in a competitive situation) as part of its general review of Rule 21 of the Code (which prohibits parties to an offer from taking action that may "frustrate" an offer) later in 2023.

Miscellaneous amendments to the Takeover Code

In its second consultation (PCP 2022/4), the Panel proposed miscellaneous amendments to the Code. You can read more about the proposed amendments in our previous Corporate Law Update.

In its response statement (RS 2022/4), the Panel has confirmed that it will be proceeding with the amendments proposed in its consultation.

However, the Panel has also acknowledged concerns relating to its proposed amendment to require the board of a target company to give its view on the action shareholders should take where a bidder has put forward "alternative offers".

This might include where a bidder makes a cash offer but gives target company shareholders the option to take securities (e.g. shares in the bidder) in place of cash, but the board is unable to recommend a particular course of action because the choice will depend on the individual circumstances of each target company shareholder.

In response to this, the Panel has confirmed the following.

• In these circumstances, the board of a target company will be able to issue a statement that the appropriate action a shareholder should take will depend on "various factors and their particular circumstances".
• The Panel has prepared example wording that a target company board could use for this purpose in four specific scenarios.
• A "mix-and-match" facility (where target shareholders can vary the amounts of cash and securities they receive under an offer) is not an "alternative offer", and so the board of the target company will not need to provide a view on how shareholders might fix their election under the facility.

The Panel has published the relevant implementing instrument (2023/2).

The amendments to the Code following both consultations will take effect on 22 May 2023.

Government publishes updated Green Finance Strategy

The UK Government has published an update to its Green Finance Strategy, which it originally released in 2019.

Among other things, the updated Strategy confirms the following:

• The Government will consult later in 2023 on requiring the largest companies to publish their net zero transition plans.
• It will also consult in autumn 2023 on proposals for a UK green taxonomy.
• It will continue to assess whether the global sustainability disclosure standards that are being prepared by the International Sustainability Standards Board (ISSB) are suitable for the UK.

• It intends to publish a call for evidence on reporting scope 3 greenhouse gas emissions. (Scope 3 emissions currently fall outside the scope of the UK's mandatory reporting regimes.)