Corporate law update: 20 - 26 February 2021

In this week’s update: Companies House ordered to remove unnecessary material from the public register, the court suspends proceedings so a price adjustment determination can be completed, ICSA publishes new guidance on general meetings in 2021, the BVCA publishes a report on how private equity and venture capital can contribute to post Covid-19 recovery and the Financial Reporting Lab publishes a report on the use of virtual on augmented reality in corporate reporting.

• The court orders Companies House to remove unnecessary material from the public register
• The court suspends proceedings to allow a price adjustment determination to be completed
• ICSA publishes new guidance on general meetings in 2021 and the impact of Covid-19
• The BVCA publishes a report on how private equity and venture capital can contribute to post-Covid-19 recovery
• The Financial Reporting Lab publishes a report on the use of virtual and augmented reality in corporate reporting

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

Companies House ordered to remove unnecessary material from register

The High Court has ordered Companies House to delete material from the public register that had not needed to be filed.

What happened?

In Re Peter Jones (China) Ltd [2021] EWHC 215 (Ch), the administrators of a company filed a statement of affairs with the Registrar of Companies containing schedules of information which, under the Insolvency (England and Wales) Rules 2016, were not permitted to be filed publicly. The Registrar acts through Companies House, the body with which the public generally interacts and is more familiar.

Initially, the Registrar rejected the filing but, on a subsequent application, he accepted and filed the entire statement, including the information that should not have been filed.

Under section 1074 of the Companies Act 2006, where a document delivered to the Registrar contains "unnecessary material", the Registrar must reject the document if the material cannot "readily be separated" from the rest of the filing. If the unnecessary material can readily be separated, the Registrar can either register the document either with or without that information.

Under section 1094 of the Companies Act 2006, the Registrar can remove anything from the register which he had the power, but not a duty, to register (with some exceptions). This includes any "unnecessary material" which he has chosen to register under section 1074. The Registrar does not need a court order to do this.

The administrators applied to Companies House to remove the relevant information using its power under section 1094. However, the Registrar declined to do so without a court order.

The administrators applied to the court.

What did the court say?

The judge found that the information in the schedules to the statement were "unnecessary material" that should not have been included in the filing. However, they were "readily able to be separated" from the rest of the statement.

This meant that the Registrar was not required to reject the administrators' filing, but he was required to exercise its discretion under section 1074 as to whether to file the statement with the unnecessary material included, or to omit that information from the filing.

Where the Registrar has a discretion of this kind, his decisions are capable of being subject to judicial review. That means that the courts can make an appropriate order, such as requiring the Registrar to re-visit his decision, if he does so irrationally or takes a decision at which no reasonable person could arrive (so-called "Wednesbury unreasonableness").

In this case, it was not clear whether the Registrar had exercised his discretion under section 1074. However, if he had, the judge felt that he had done so irrationally and unreasonably. It was difficult to see how the Registrar could rationally have exercised his discretion to register material where statute specifically prohibited it.

Alternatively, having registered the statement, the Registrar subsequently had discretion to remove the material under section 1094. Again, the judge felt that he had acted irrationally in declining to do so.

The court therefore ordered the Registrar to remove the unnecessary material in the schedules from the filing.

What does this mean for me?

The decision in this case is not surprising but the route by which it was reached is instructive.

The powers that Companies House has under legislation to refuse to register filings and to remove material from the public register are patchy and technical. This often results in Companies House defaulting (as it did in this case) to a cautious approach of acting only on the basis of a court order. Even where (again, as in this case) that approach is unfounded, the issue can only be resolved through court proceedings.

The trite but rather critical point, therefore, is always to check a filing thoroughly before submitting it to Companies House to ensure it contains the correct details and does not contain any superfluous material (particularly confidential information). Once Companies House has registered a document, it can be painstakingly difficult and cumbersome to rectify the issue, if, indeed, it can be rectified at all.

It is worth noting, however, that the Government has recently consulted on expanding Companies House's powers to remove inaccurate or fraudulent information from the public register. See our previous Corporate Law Update for more information. It may be that any reforms coming out of this consultation will widen and improve Companies House's existing ability to rectify these kinds of error.

Court stays proceedings pending outcome of SPA price determination

The High Court ordered a stay of proceedings relating to the scope of the mandate of an independent expert appointed to determine a price adjustment under a share sale agreement until the expert had delivered its determination.

What happened?

General Electric Company v AI Alpine US Bidco Inc. [2021] EWHC 45 (Ch) concerned the sale of the shares in a company operating a power distribution business. The terms of the sale were set out in a share sale and purchase agreement (SPA).

Under the SPA, the price for the shares was to be adjusted after completion of the sale to reflect the company's working capital, cash and debt at the time of completion. This mechanism - usually referred to as a "completion accounts" mechanism - is seen frequently on trade sales and is common in certain jurisdictions, such as the United States.

The mechanism, which took a relatively standard form, would operate as follows:

• The seller would send the buyers an "estimated closing statement" before completion, setting out its estimate of the adjustment amount. This would form the basis of the amount which the buyers would pay at completion.
• Within 75 days of completion, the buyers would send the seller a "final closing statement" setting out any changes required to the estimated closing statement. There would then be a balancing payment from the buyers to the seller, or vice versa, to arrive at the correct payment.
• The seller would have 60 days to dispute any items set out in the buyers' final closing statement. If it did, the parties would appoint an independent accountancy firm to determine the dispute.

The parties followed the procedure. The buyers served a final closing statement. However, the buyers alleged that the company had not properly adopted historical accounting decisions or judgments, and they attempted to correct this by substituting what they claimed were the correct decisions and judgments within their final closing statement.

The seller disputed several items in the buyers' final closing statement, including the buyers' attempt to introduce differing accounting judgments. It argued that any dispute over the company's historical accounting practices should be dealt with through a claim for breach of warranty, rather than through the completion accounts mechanism.

The parties appointed an independent accountancy firm (the "IAF") to resolve the dispute. The IAF was instructed to seek non-binding legal advice from counsel on (among other things) whether the buyers were permitted to re-visit the company's historical accounting practices in their final closing statement.

Counsel gave their advice and concluded that the buyers were not prohibited from raising issues about the appropriateness of the company's historical accounting treatment.

The seller subsequently applied to court for a declaration that the buyers were not permitted to revisit the company's accounting treatment through the completion accounts mechanism. It also asked the IAF to suspend work pending the court's decision. The IAF agreed not to issue a final determination, but it continued to request information from the parties.

In response, the buyers asked the court to stay the seller's application so as to allow the IAF to complete its work. They argued that, if proceedings were stayed, the IAF would be in a position to issue its determination promptly.

What did the court say?

The court needed to decide whether the question of historical accounting practices amounted to a dispute about the IAF's "jurisdiction" or its "decision-making authority". This is admittedly a very fine distinction, but the answer has a significant legal consequence.

If the matter of historical accounting practices was outside the IAF's "jurisdiction", then the IAF had no ability to consider it at all. The court would be entitled to intervene at any stage to settle the dispute.

By contrast, if that matter was within the IAF's jurisdiction, then the question would instead be the extent to which the buyers and the seller had given the IAF to take historical accounting practices into account when reaching its determination. In this case, the court would not normally intervene until after the IAF had made its determination. If, however, the IAF were to act outside its authority, the court could then set its determination aside.

The answer to both these questions was a matter of interpreting the terms of the SPA.

In this case, the court said the matter fell within the IAF's jurisdiction. It agreed to stay the proceedings to allow the IAF to make its determination. Only once that was known could it be said that a real issue may have arisen and whether anyone had been "aggrieved" by the determination.

The judge's decision was influenced by several factors, including that:

• the IAF's determination was "well advanced" and so an intervention by the court would not be likely to save the buyers and seller from incurring substantial costs;
• the proceedings would take some time and so delay what was intended to be a quick process for determining the final price under the SPA; and
• there is no saying that the seller would be unhappy with the IAF's determination, and to continue proceedings at this point would potentially be a waste of time and resources.

What does this mean for me?

The decision raises the perhaps obvious point that, if a party wishes to challenge the limits of an expert's authority under a price determination mechanism, it is wise to do so at an early stage in proceedings, rather than after a substantial amount of work has been done.

Depending on the circumstances, it may also be wise not to accede too readily to the expert's requests or to participate too substantially in the determination process, as this may be seen as an indication that the party has accepted the expert's jurisdiction or is at least prepared to see the process play out before raising any challenge.

However, it is clearly better to avoid a dispute in the first place. This becomes a matter of drafting the SPA carefully, setting out clearly the matters on which the expert is to reach a determination, as well as the factors the expert is or is not permitted to take into account when doing so. Every sale and target company is different, so the parties and their advisers will need to scope and scrutinise this carefully on a case-by-case basis.

ICSA publishes guidance on general meetings during Covid-19

ICSA: The Chartered Governance Institute has published a new guidance note on general meetings during 2021 and the impact of Covid-19. The guidance is available to ICSA members and to free subscribers to the Institute's website.

The guidance has been published following the Prime Minister's recent statement on 22 February 2021 in order to assist companies with their 2021 annual general meeting (AGM) season. It is predicated on the assumptions that companies will continue to need to hold "closed AGMs" until at least 17 May 2021, and possibly until 21 June 2021.

The guidance is also prompted by the end on 30 March 2021 of existing arrangements under the Corporate Insolvency and Governance Act 2020 (CIGA), under which companies have temporary additional flexibility when holding general meetings, including to hold meetings purely electronically. Once these arrangements end, uncertainty around the validity of purely virtual meetings will resurface.

The note has been prepared in collaboration with the City of London Law Society Company Law Committee and Martin Moore QC and has the support of the Financial Reporting Council (FRC), the Investment Association, the Investor Forum and the Quoted Companies Alliance (QCA).

The guidance reminds companies of key legal points when holding a meeting, including the following:

• Companies will need to adopt a flexible approach to holding meetings after 30 March 2021, as the options available will depend on the legislation in force at the time.
• Once the flexibility under CIGA ends, "closed meetings" will be possible only if legislation or guidance precludes gatherings of more than a very limited number. Companies cannot simply exclude shareholders entirely or impose a limit on the number attending, but they can strongly recommend that shareholders not attend due to the unpredictable circumstances.
• Companies will need to react quickly to relevant health and safety measures and should bear in mind that venue capacities are likely to be significantly reduced due to social distancing rules.
• Companies can legally organise "hybrid meetings", even if their articles do not expressly contemplate this, so long as their articles do not prohibit them. However, if a company does intend to hold a hybrid meeting, it should include specific provisions in its articles to ensure that the procedure for holding the meeting is clear.
• In any case, companies should consider offering shareholders as much electronic engagement as possible, before, after and during a meeting, as this may give shareholders confidence that they can engage with the business of the meeting without physically attending.
• Companies should plan their meeting based on restrictions in place when the notice is sent out and where the meeting is to be held. However, they should consider contingency plans in case the situation changes before the meeting takes place, such as the ability to upsize or downsize the venue if required and using a venue under their control (such as an office).
• Companies should announce any change to the format of their meeting via their website or a regulatory information service (RIS) and advise shareholders, in the notice of meeting, to monitor these channels for any potential announcements.
• The chair of the meeting should use their broad powers to ensure the venue remains Covid-19 secure and any relevant risk assessments can be performed. This may include asking shareholders to pre-register their intention to attend so that numbers can be gauged in advance.

It then goes on to provide certain good practice recommendations, including the following:

• Companies should consider holding a hybrid meeting to ensure maximum attendance. If that is not desirable or appropriate, they should consider other options to enable shareholder engagement through electronic means.
• Methods of shareholder participation might include online Q&A ahead of the meeting, webinars and town hall events, or live-streaming the meeting with a facility to ask questions in real time.
• A company should provide clear instructions on how to vote and how to appoint a proxy on its website, particularly where it is proposing to hold a hybrid meeting.
• The note provides detailed practical guidance on managing questions from shareholders and on ensuring a venue is Covid-19 secure.
• Finally, the note provides sample wording for a notice convening a "closed" physical general meeting, a hybrid meeting where there are local or national restrictions in place, and a meeting where shareholders are to attend.

Perhaps the key point arising from the guidance is that companies should begin planning now how they intend to hold their AGM and any other general meetings in 2021. Any changes to the regular format will require planning and time.

Also this week...

• BVCA publishes report on post-Covid-19 recovery. The British Private Equity and Venture Capital Association (BVCA) has published a new report on how the UK private equity and venture capital industry can support economic recovery after Covid-19. Titled "New Horizons", the report explores how PE and VC can contribute to UK public policy priorities and provides case studies on how they can create public value.
• FRC Lab publishes report on virtual and augmented reality in corporate reporting. The Financial Reporting Lab of the Financial Reporting Council has published a report on how virtual reality (VR) and augmented reality (AR) technologies could be used to expand the scope of and audience for corporate reporting. The report also considers mixed reality (MR) and 360° video.