Corporate Law Update: 21 - 27 May 2022

27 May 2022

In this week’s update: An individual director did not have authority to launch a court claim, the FCA proposes significant changes to the UK listing regime, a Takeover Panel consultation on the meaning of “acting in concert”, 30% Club guidance on gender diversity reporting, a consultation on amendments to FRS 100 and a survey on new sustainability reporting standards.

Owing to the Queen’s Platinum Jubilee, there will be no Corporate Law Update next week. The next Update will be for the week ending 10 June 2022.

Individual director did not have authority to commence proceedings

The High Court has held that a single director on a company’s two-director board did not have authority to commence legal proceedings on the company’s behalf.

What happened?

Rushbrooke UK Ltd v 4 Designs Concept Ltd [2022] EWHC 1110 (Ch) concerned a company carrying out architectural consultancy and property development services. The company had two directors, each of whom held 50% of the company’s shares.

One of the company’s creditors issued a statutory demand on the company after the company failed to pay the balance of certain outstanding invoices.

One of the company’s two directors (S) contested the invoices, alleging that the work to which the invoices related had not been completed and requesting documentation. He purported to instruct solicitors on behalf of the company.

In due course, the solicitors applied to the court, in the company’s name, for an injunction to prevent the creditor from presenting a petition to wind the company up.

Meanwhile, the company’s other director (B) had acknowledged receipt of the creditor’s statutory demand and confirmed that the company had not resolved to instruct the solicitors. He also wrote to the solicitors, “disinstructing” them to the extent they were purporting to act on behalf of the company.

The question for the court was whether S did in fact have authority to instruct the solicitor (and, therefore, to begin legal proceedings) on behalf of the company.

What did the court say?

The court found that S had not had authority to instruct solicitors or make the injunction application on behalf of the company.

The judge noted that the company had adopted Table A (the predecessor to the Model Articles), which requires board decisions to be made by a company’s board as a whole. Table A does give the board power to delegate authority to a committee of the board, the company’s managing director or any other executive director of the company, but, in this case, that had not happened.

The courts have previously held that directors of a company may be able to launch legal proceedings in its name without a board resolution if the other directors are in breach of duty (and may attempt to block the litigation).

However, again, in this case, that had not happened. S had argued that B was in breach of duty, but the court found that the company had become insolvent and B was acting properly in his duty to act in in the interests of the company’s creditors.

What does this mean for me?

A director who perceives misguided or even inappropriate conduct by their fellow board members will want (or, indeed, feel themselves duty-bound) to take action to put a stop to that behaviour.

This can be particularly frustrating where the board is effectively “deadlocked” on the matter because the allegedly wayward directors oppose taking any action. But, generally speaking, this does not give an aggrieved director licence to begin taking legal action without a decision of the board as a whole.

Instead, an aggrieved director should take legal advice and assess all potential options open to them. These might include some or all of the following.

  • If the director is also a shareholder, bringing an unfair prejudice petition under section 994 of the Companies Act 2006. The director will need to show that the company’s affairs have been conducted in a way that is unfairly prejudicial to the director as a shareholder. The director should also bear in mind that the usual remedy for unfair prejudice is a buy-out of the petitioner’s shares.
  • Likewise, if the director is a shareholder, bringing a derivative claim on behalf of the company. The director will need to show that the claim is one that a director seeking to promote the success of the company would bring. The director will also need to bear in mind that, if the court awards damages, those damages will belong to the company and not to the director.
  • Attempt to launch proceedings anyway. If the other director(s) truly is/are in breach of duty, the court may well permit a claim on the basis that wayward or conflicted directors should not be able to use their position to block proceedings against them. However, this will require the aggrieved director to show a good case that there has been some breach of duty.

FCA announces planned reform of UK listing regime

The Financial Conduct Authority (FCA) has launched a discussion on significant structural changes to the UK’s listing regime.

The proposed reforms aim to “attract more high-quality, growth companies and give investors greater opportunities”, as well as making the UK’s listing regime “more effective” and “easier to understand”.

The discussion follows the FCA’s consultation in July 2021, in which it set out numerous proposals for reform. You can read more about that consultation in our previous Corporate Law Update.

The proposals are set out in an FCA Discussion Paper (DP22/2). The FCA has invited stakeholders to provide comments by 28 July 2022.

We have set out the key proposals below.

  • A single listing segment. The current distinction between a “premium listing” and a “standard listing” of equity shares would disappear. Instead, there would be a single segment with one set of eligibility criteria and robust, minimum continuing obligations.

    Issuers would be able to “opt into” a set of supplementary obligations, based on the current continuing obligations for premium-listed issuers. The choice to adopt the supplementary obligations (or not) would be a factor in an investor’s decision whether to take securities.
  • A single set of listing principles. The current distinction between “Listing Principles” and “Premium Listing Principles” would also disappear. Instead, the existing Premium Listing Principles would apply to all listed companies. This would include the principle of “one share, one vote”, as well as the principle of treating all holders of the same class of shares equally.
  • Streamlined eligibility criteria. The FCA would remove certain eligibility criteria that have to date represented a barrier to listing for early-stage and high-growth companies. These include the need for a revenue track record, historical financial statements and a “clean” working capital statement. These matters would instead be dealt with through disclosures in a company’s prospectus, with investors deciding whether to take securities based on those disclosures.

    Issuers would still need a minimum market capitalisation of £30m and to demonstrate a post-IPO “free float” of at least 10%.
  • Significant transactions. Class 1 transactions (which require shareholder approval) would form part of the voluntary “supplementary” continuing obligations. The FCA has asked for views on whether the current class test threshold of 25% is appropriate or should be raised.
  • Sponsors. All listed companies would be required to appoint and retain a sponsor, although the extent of the sponsor’s ongoing involvement would depend on whether the issuer adopts the supplementary continuing obligations. The FCA is seeking views on the record-keeping obligations and conflict of interest and fee structure restrictions to which sponsors should be subject.
  • Dual-class share structures. These would be permitted in the new single segment on the basis they are currently available for a premium listing. This would represent an increase in regulation of dual-class structures from the current position for a standard listing, but, following feedback, the FCA feels there would be support for this.
  • Existing standard-listed companies. The new single segment would incorporate a greater degree of regulation than the existing “standard listing” segment that may not be appropriate for existing issuers. (For example, all listed companies would need to appoint a sponsor.) As a result, existing standard-listed issuers would be able to “keep” their standard listing if they wish to do so.
  • Existing premium-listed companies. These companies would have a period of time to decide, by shareholder vote, whether to adopt the supplementary continuing obligations or to (effectively) downgrade to the new minimum standard.

Takeover Panel consults on the meaning of “acting in concert”

The Takeover Panel is consulting on changes to provisions of the Takeover Code (the Code) that address when parties are “presumed” to be acting in concert.

Under the Code, which regulates mergers and takeovers of public companies in the UK, two or more parties are acting in concert if they co-operate to obtain or consolidate control of a company or to frustrate the successful outcome of an offer for a company.

Parties who act in concert are treated as a single “person” by the Code. This can have significant consequences. For example:

  • If parties acting in concert collectively come to hold more than 30% of a company’s shares, this may trigger a requirement to launch a mandatory offer for the company.
  • If a person acting in concert with an offeror acquires shares in a company for an amount above the existing offer price, the offer will need to raise the offer price to match that amount.

Whether parties are acting in concert is a question of fact. However, in nine specific scenarios, the Panel will presume parties are acting in concert unless they can demonstrate otherwise. This enables the Panel to take action without having to present factual proof in each and every case.

The Panel is proposing the following changes (among others) to the presumptions. The changes are very technical in nature. If you require more information on any of these, please speak to your Macfarlanes contact.

  • Remodelling presumption 1 (associated companies) to extend it to derivative interests in shares and interests in other kinds of undertaking, and to raise the threshold from 20% (of equity share capital) to 30% or (in some circumstances) 50%, in line with other Code provisions. The changes are detailed and involve creating two new presumptions, based variously on control over equity share capital and control over voting rights.
  • Deleting presumption 4 (investment entities), which states that a fund manager is presumed to be acting in concert with a person whose funds the fund manager manages on a discretionary basis.
  • A new presumption codifying the Panel’s existing practice of treating an investment manager or investment adviser as acting in concert with an offeror, consortium investor or offeree company to which it is providing advice. The Panel also proposes to amend the thresholds at which it will normally grant a waiver on the basis that other parts of the manager’s or adviser’s larger organisation are independent of the manager or adviser itself.
  • A new presumption that an investor in a limited partnership (LP) or an investment fund will be acting in concert with the LP or fund, as well as any bid vehicle formed by the LP or fund, above thresholds identical to those proposed for the remodelled presumption 1. This would clearly have an impact on public-to-private (P2P) transactions backed by significant investors.
  • Changes to the presumption that companies act in concert with their directors. These are designed to ensure that companies do not become entwined in offers made independently by their directors or by other companies by virtue of cross-directorships. The Panel is proposing similar changes to the presumption that companies act in concert with their pension schemes.

The Panel is proposing to hold a webinar on the proposed amendments in late June or early July 2022. Interested parties can register their interest by emailing the Panel.

The Panel has asked for comments by 23 September 2022. It expects to publish a response statement setting out its final proposals in late 2022.

30% Club publishes guidance for companies on diversity reporting

The 30% Club has published new guidance for companies on how to report effectively on diversity.

The 30% Club is a business-led campaign, led by Chairs and CEOs, to boost female representation at board and C-suite level in the world’s biggest companies. The organisation originated in the UK but now spans 20 countries worldwide.

The Club has set a “global mission” of at least 30% representation of women on all boards and C-suites globally, known as its “beyond 30% target”. By signing up to the Club, CEOs and Chairs can signal their commitment to reaching the target at board and executive committee (ExCo) level.

The purpose of the guidance is to create a shared understanding of useful reporting on diversity so that investors can confidently use information in their decision-making, as well as to help companies understand better what investors value most in disclosure on diversity.

The guidance is aimed at FTSE 350 companies but may be useful to other companies, including unlisted companies, that intend to report on their board and senior management gender diversity.

The Club’s targets sit alongside other UK board and senior management gender diversity targets. These include:

  • the new FTSE Women Leaders Review targets of 40% female representation and at least one woman in one of the four main board roles (Chair, CEO, Senior Independent Director and Finance Director) by the end of 2025 (see our previous Corporate Law Update); and
  • the new mandatory reporting targets for companies listed in the UK set by the Financial Conduct Authority, which codify the targets above and incorporate ethnicity targets, in each case on a comply-or-explain basis (see our previous Corporate Law Update).

Companies looking to report against those targets may find the new 30% Club guidance useful.

FRC consults on amendments to FRS 100

The Financial Reporting Council (FRC) is consulting on proposed amendments to FRS 100, which sets out financial reporting requirements for entities in the United Kingdom or Ireland.

The amendments relate to application guidance within FRS 100 titled “The Interpretation of Equivalence”, which sets out the meaning of “equivalent” for various purposes.

These include section 401 of the Companies Act 2006, which exempts a UK company from preparing group accounts if it and its subsidiary undertakings are themselves incorporated into the consolidated financial statements of a non-UK parent undertaking.

For the exemption to apply, that parent undertaking’s consolidated financial statements must be prepared in a manner “equivalent” to the accounting requirements in the Companies Act 2006, or using UK-adopted international accounting standards (IAS) or accounting standards that are “equivalent” to UK-adopted IAS.

The FRC has asked for comments by 26 August 2022.

FRC seeks stakeholder views on new sustainability reporting standards

The Financial Reporting Council (FRC) is seeking views from stakeholders on the exposure drafts recently published by the newly formed International Sustainability Standards Board (ISSB).

The ISSB published drafts of the first two IFRS Sustainability Disclosure Standards in April this year. For more information on those drafts, see our previous Corporate Law Update.

To gather UK stakeholder views, the FRC has developed a short survey. The deadline to provide comments is 29 May 2022. Data from the survey will inform the FRC’s response to the ISSB Exposure Drafts.