Corporate Law Update: 19 - 25 March 2022

25 March 2022

In this week’s update: an updated checklist for managing an electronic signing on a corporate or commercial transaction, the FCA and AIM are to bring an end to temporary relaxations introduced due to Covid-19 and the court orders a listed company to be wound up on “just and equitable grounds.

Updated checklist for electronic signings published

Networking for Know-How, an association of corporate professional support lawyers (PSLs) and knowledge lawyers (KLs), has published an updated checklist for managing an electronic signing process on a corporate or commercial transaction using an online platform.

The checklist was originally produced in January 2021 by a working group of six corporate PSLs and KLs, all members of Networking for Know-How.

The latest version of the checklist has been updated following publication of the interim report of the Industry Working Group on Electronic Execution of Documents in February 2022. For more information on that report, see our previous Corporate Law Update.

FCA and AIM to end temporary Covid-19 relaxations

The Financial Conduct Authority (FCA) has published Primary Market Bulletin 39, confirming that it intends to bring an end to temporary relaxations introduced in light of the Covid-19 pandemic.

  • In March 2020, the FCA announced temporary relief giving issuers an additional two months to publish their annual financial reports.
  • In May 2020, the FCA announced further temporary relief giving issuers an additional month to publish their half-yearly financial reports.
  • In April 2020, the FCA introduced temporary measures allowing issuers (in certain circumstances) to disclose key assumptions on business disruption during the pandemic in a prospectus or circular without including a qualified working capital statement and to apply to the FCA to dispense with a general meeting in connection with a class 1 or related party transaction.

The FCA considers that practice has evolved such that issuers and their advisors are now able to return to previous practices. As a result, the filing deadline relaxations will no longer be available for reporting periods ending after 28 June 2022. The other relaxations will also cease from 28 June 2022.

Separately, the London Stock Exchange (LSE) has published an Inside AIM bulletin confirming that it too intends to bring an end to temporary relaxations introduced due to Covid-19.

The LSE has confirmed that these temporary reliefs will no longer apply for annual or half-yearly financial periods ending after 28 June 2022.

Publicly traded company could be wound up on just and equitable grounds

The High Court has held that a publicly traded company should be wound up on “just and equitable grounds” because its original purpose (its “substratum”) was no longer achievable.

What happened?

Re Klimvest plc [2022] EWHC 596 (Ch) concerned an English company incorporated by three individuals to amalgamate previous business ventures and create a single group of companies.

The main business of the company was to develop software for training, support and translation functionality in relation to established IT applications.

In October 2006, the company raised finance through a series of private placements and obtained a listing on the French market Alternext (now Euronext Growth). To this end, it produced an offering circular for new investors. Following the listing, all three individuals were both directors and shareholders of the company.

In September 2018, the company’s directors were approached by an enterprise software company (P1C) with an offer to acquire the shares in the company. The directors entertained the proposition.

However, following due diligence, P1C reduced its offer price by nearly 50%. This caused a split in the board, with two directors (a Mr Duneau and a Mr Sénégas) inclined to recommend the reduced offer and the third (a Mr Balcaen) concerned that it undervalued the business.

In due course, in part caused by timing issues, P1C amended its offer to acquire the company’s assets from it, rather than acquire the shares in the company from its shareholders. The company and P1C entered into an agreement for the sale of all the company’s assets in January 2019.

It became clear that, following the sale, Messrs Duneau and Sénégas expected the company to be liquidated and the sale proceeds distributed to them. However, Mr Balcaen expressed a desire for the company to continue as an investment vehicle and use sale proceeds to invest in other emerging technology businesses, meaning Messrs Duneau and Sénégas would not receive a sale distribution.

What was the claim?

In response, Mr Duneau brought proceedings in the High Court for an order to wind the company up on “just and equitable grounds”.

Under the Insolvency Act 1986, a company’s members can petition the court for an order to wind a company up if the court feels it is “just and equitable to do so”. Despite the name of the Act, a member of a company can make a petition of this kind whether or not the company is insolvent.

The court will not grant the order if the petitioner has another remedy and it would be unreasonable not to pursue that remedy instead. This is because winding a company up as a means of resolving a shareholder dispute has historically been described as an “exceptional remedy” and one “of last resort”.

Subject to this, there are no conditions on when the court can make an order to wind a company up, and it effectively has unfettered discretion to consider when it is “just and equitable” to do so.

However, over time, the courts have identified certain circumstances in which there are likely to be good grounds for the court to make a winding-up order.

These include when the company has (in legal terms) “lost its substratum”. This happens when the company is no longer able to pursue the purpose for which its members originally created it, or when it becomes clear that there is no intention that it do so.

Mr Duneau argued that the company’s original purpose, in line with the three individuals’ shared intention when they incorporated it, was to develop and distribute the software described above. Once the company sold all its assets (including its subsidiaries), it was no longer in a position to do that.

Mr Balcaen, by contrast, argued that the company had always operated through its subsidiaries, which it had described in its accounts as its “investments”. This indicated that the company was in fact an investment company, and that it was able to continue investing in businesses following the sale.

What did the court say?

The judge examined various documents published by the company over time, including its memorandum of association, the offering circular and statements in its previous financial statements.

The judge did not agree that the company’s purpose was quite as narrow as Mr Duneau had proposed. Rather, it included acquiring businesses which complemented the company’s products in development and funding research and development of new offerings.

However, it did not extend to general investments in the way that Mr Balcaen had suggested.

The judge felt that, following the sale, the company had lost its purpose. He gave three main reasons.

  • It had become impossible (or “at least practically impossible”) for the company to pursue its main or paramount object or purpose.
  • Even if it could, the sale of the company’s assets and the proposal to invest in promising technology companies were, together, a very different venture from that originally proposed and represented a “clear abandonment” of the pre-existing purpose of the company.
  • Mr Balcaen was effectively proposing to turn it into his own private investment vehicle. This was a course of conduct “fundamentally different from” what could fairly be regarded as within the original common understanding of the company’s shareholders when they became members.

The court therefore made the order to wind the company up.

What does this mean for me?

This is an interesting case. Decisions to wind a company up on just and equitable grounds generally rely on some understanding between a company’s members as to how it will be run or its purpose.

This is much easier to establish for a closely-held private company with only a few shareholders who have been members since inception, where the common understanding can be readily identified in the company’s founding documents. It is difficult in relation to a publicly traded company with a potentially large and disparate ownership base where there is less potential for a shared understanding.

In this case, although the company was publicly traded, over 99% of its shares were concentrated in the hands of four individuals, with only 0.5% in free float.

Nonetheless, the decision shows that even listed companies need to be mindful of their original purpose. Once that purpose has been fulfilled, shareholders may well expect an orderly wind-down of the company, and this decision may give them some ammunition to enforce that.

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