Corporate Law Update: 18 - 24 June 2022

24 June 2022

In this week’s update: the court considers when it is reasonable to withhold consent to a contractual assignment, the FRC publishes updated guidance on a company’s strategic report, regulations are published that would expand registration under the UK’s new register of overseas entities and the Government and the CMA establish a framework for mutual cooperation on national security and merger control.

Court considers when it is reasonable to withhold consent to the assignment of a contract

Last week, we looked at a case where the court found that a clause in a contract requiring written notice to terminate the contract did not prevent the parties from novating it informally without following the termination procedure.

In that same judgment, the court also analysed whether the transferring party had (as a back-up) effectively assigned its rights under the contract. In doing so, the court discussed when it is unreasonable for a counterparty to withhold consent to an assignment of contractual rights.

What happened?

As we noted last week, Gama Aviation (UK) Ltd v MWWMMWM Ltd [2022] EWHC 1191 (Comm) concerned an aircraft support services agreement, under which a company known as International Jetclub provided certain support services to the owner of an aircraft (the Owner).

In 2017, Gama Aviation acquired International Jetclub’s holding company, with the result that International Jetclub became an indirect subsidiary of Gama Aviation (UK) Limited (Gama UK).

Following a subsequent group rationalisation, Gama UK continued to provide the support services previously provided by International Jetclub, and the Owner began to pay Gama UK instead of International Jetclub and to request additional services from Gama UK.

Gama UK argued that this amounted to a novation of the contract from International Jetclub to Gama UK. The Owner disagreed, but the court ultimately found that the contract had been novated.

However, as a form of back-up, to ensure that Gama UK obtained the benefit of International Jetclub’s rights under the support services agreement, International Jetclub formally assigned its rights under the contract to Gama UK.

The contract contained a clause stating that International Jetclub was not permitted to assign its rights under the contract without the Owner’s consent, which was “not to be unreasonably withheld”.

The Owner refused consent to the assignment. Gama UK and International Jetclub argued that the Owner had been unreasonable in refusing consent.

What did the court say?

The court found that the assignment was effective. The reasons the Owner advanced for refusing did not persuade the judge that withholding consent was reasonable.

In reaching this decision, the judge considered certain factors, based on previous case law, that are relevant when deciding whether it is reasonable to withhold consent to an assignment.

Those points are useful for commercial contract parties to bear in mind and can be distilled as follows:

  • If consent has been unreasonably withheld, the party seeking consent is permitted to assign. The court will proceed as if consent had been given.
  • For withholding consent to be “reasonable”, the party in question must follow a reasonable process and reach a rational outcome.
  • A reasonable process involves taking into account relevant considerations and disregarding irrelevant considerations.
  • A party cannot refuse consent on extraneous or disassociated matters or to achieve a collateral purpose. The refusal must be connected with the party’s conduct under the contract.
  • A party’s decision to refuse consent must be based on reasons that actually arose at the time of the assignment. A party cannot justify their decision by reference to later events.

What does this mean for me?

This is a concise and useful reminder of factors a contract party should take into account and steps they should take when deciding whether to consent to an assignment.

This case concerned a contractual clause expressly stating that consent could not be unreasonably withheld. However, prohibitions on assignment often do not include language of this kind, stating simply that assignment is prohibited without the counterparty’s consent.

Contract parties should not assume that an absolute requirement for consent with no duty to act reasonably gives them unfettered discretion to refuse consent. Where a contract gives a party a degree of discretion over whether to permit or prevent a particular matter, there is scope for the so-called Braganza duty to apply.

This duty requires the party making the decision in question not to act irrationally, unreasonably or in bad faith. Many of the steps required to demonstrate that consent was not unreasonably withheld are equally relevant when demonstrating that a party has complied with the Braganza duty (if it applies).

The Braganza duty traditionally applies where a party has a range of alternatives from which to choose, rather than a binary choice. However, we have increasingly seen the courts apply the duty to a simple decision whether or not to withhold consent.

For more information on the Braganza duty, see our recent Corporate Law Update on a decision on allocating partnership profits.

Whether the Braganza duty applies or a contract party is under an express contractual duty not to act unreasonably, it is worth taking certain steps to bolster the prospect that the decision will be upheld.

  • Follow a proper process when making the decision and document that process. This might merit a full board or executive committee meeting, but equally it could be a decision made by a contract manager, depending on how significant the contract is to the contract party’s decision.
  • Document the reasons for the decision. In particular, set out the factors the party has taken into account when reaching the decision and the weight it has given each. The courts are unlikely to interfere with a decision if the contract party can prove that, at the time, they had a genuine commercial basis for reaching that decision.
  • Communicate the decision. Do not simply ignore requests for consent. Often a clause will also state that consent must not be unreasonably delayed. Even if it does not, delaying consent indefinitely without giving a reason will eventually amount to unreasonably withholding consent.

FRC publishes updated guidance on the strategic report

The Financial Reporting Council (FRC) has published an updated version of its guidance to companies on preparing their strategic report.

The guidance is designed to encourage companies and their directors, as well as limited liability partnerships (LLPs) and their members, to consider how the strategic report fits within the annual report as a whole, with a view to improving the quality of corporate reporting.

The principal purpose of the update is to incorporate guidance on the new climate-related financial disclosures that certain companies and LLPs will need to publish for financial years beginning on or after 6 April 2022. To this end, the sections of the guidance that deal with the contents of a company’s or LLP’s strategic report have now been split into three sections:

  • Section 7A, which sets out the requirements for public interest entities (PIEs) with 500 employees or fewer (although the guidance mistakenly refers to entities with fewer than 500 employees) and for entities that are not PIEs.
  • Section 7B, which sets out the non-climate related requirements for PIEs with more than 500 employees.
  • Section 7C, which sets out the climate-related financial disclosure requirements for PIEs and certain other entities with more than 500 employees.

The updated guidance also incorporates other amendments to maintain alignment with legislation.

Draft regulations would expand the new register of overseas entities

Draft regulations have been published which (if they become law) will expand the range of entities that need to be registered as the beneficial owner of an overseas entity that holds real estate in the UK.

The new regime (which is set out in the Economic Crime (Transparency and Enforcement) Act 2022) is already law but has not yet been brought into effect. It will come into effect on a day to be decided by the Government.

The draft regulations are not yet law. When they become law, they will take effect at the same time as the regime comes into force.

Under the regime, an overseas entity that holds certain types of real estate in the UK will need to register with Companies House and provide details of its “beneficial owners” and (in some cases) managing officers and any trusts that sit within its corporate structure. For more information, see our previous Corporate Law Update.

In certain circumstances, a legal entity may need to be registered as a beneficial owner of an overseas entity. These include where the legal entity is subject to the UK’s persons with significant control (PSC) regime or where it has voting securities admitted to one of certain specified securities exchanges.

The draft Register of Overseas Entities (Delivery, Protection and Trust Services) Regulations 2022 would extend registration of a legal entity if the following conditions are satisfied.

  • The legal entity is governed by the law of a territory outside the UK.
  • It is acting as a trustee (e.g. it holds shares or voting rights in the overseas entity on trust).
  • Providing trust services is a regulated activity in its territory.

As drafted, this would require various corporate trustees to be registered as a “beneficial owner” of an overseas entity (even though those trustees will themselves not have any economic interest in the overseas entity).

It would also expand the number of trusts that need to be registered. Under the regime, a trust the sits “above” the level of the overseas entity itself needs to be registered with Companies House if the trustee itself is a registrable beneficial owner.

Details of trustees will be publicly available at Companies House. Details of trusts, however, will not be publicly available and provided only to HM Revenue & Customs (HMRC).

The draft Regulations do not apply to a trust over land itself. Trusts of land do not come within the new register of overseas entities. However, a trust of land may need to be registered separately with HMRC under its Trust Registration Service, depending on where the trustees are resident, when the land was acquired and whether the trustees are liable to pay certain UK taxes.

The draft Regulations also:

  • set out how overseas entities will need to deliver information to Companies House; and
  • create a regime for withholding certain information from public inspection (modelled on that for the PSC regime) where a person is at serious risk of intimidation or violence.

The Regulations are currently only in draft form. We will provide more information when the final Regulations are published.

BEIS and CMA publish framework for cooperation and coordination

The Government has published a memorandum of understanding (MoU) between:

  • the Department of Business, Energy and Industrial Strategy (BEIS), the government department which, through its Investment Security Unit (ISU), is responsible for administering the UK’s national security screening regime; and
  • the Competition and Markets Authority (CMA), the body responsible for administering the UK’s merger control regime.

The MoU recognises that some acquisitions may be scrutinised by both BEIS under the national security regime and the CMA under the merger control regime. It therefore seeks to establish a framework for BEIS and the CMA to cooperate and coordinate with each other.

Specifically, the MoU contains broad principles for the two bodies to collaborate on the timing of investigations, interim measures and remedies and to share relevant information.

This MoU is a statement of intent designed to guide staff at BEIS and the CMA. It is not a legal document and does not bind either BEIS or the CMA.

Key points of note in the MoU including those set out below.

  • Neither BEIS nor the CMA envisages relying on the other to identify transactions of interest, but both bodies may share information on transactions being considered under either regime to enable effective coordination and alignment of their respective functions.
  • Each body will continue to engage on an informal basis with the other in relation to transactions that are notified to it or of which it becomes aware and which might be relevant to the other body.
  • If the CMA is informed that the ISU has called an acquisition in, it will endeavour, as soon as reasonably practicable, to notify the ISU on the status of a particular merger. Likewise, if the ISU is informed that the CMA is reviewing an acquisition, it will endeavour to notify the CMA. The MoU gives examples of significant events of which each body might notify the other.
  • BEIS will look to inform the CMA in advance and consider the CMA’s representations before it makes any interim or final order or clears an acquisition in which the CMA is likely to have an interest. Similarly, the CMA will look to inform BEIS before issuing any interim or final order or derogation or accepting any undertakings.
  • Where appropriate, BEIS may seek advice on remedies from the CMA.
  • To avoid potential conflicts between remedies imposed under the two regimes, BEIS may consider aligning its review process with the CMA’s review processes on a particular case by requesting a voluntary extension period from the merger parties. The MoU states that such a decision will, in general, follow the application of an interim order.
  • BEIS must take decisions on the basis of national security. If multiple remedies are available to mitigate national security risks, BEIS will consider representations from the CMA as to the relative impact of those remedies on any competition concerns identified by the CMA.
  • If BEIS has made a final order or final notification under the national security screening regime, the Secretary of State may direct the CMA to do (or not to do) anything under the merger control regime in order to mitigate the risk to national security. If multiple directions are available, BEIS will consider representations from the CMA as to their relative impact on any competition concerns identified by the CMA.