Corporate Law Update: 25 June - 1 July 2022

01 July 2022

In this week’s update: the new register of overseas entities that hold UK land is to launch “this Summer”, a refreshed ESH measurement framework for venture-backed start-ups, the results of a survey of quoted SME non-executive directors, a consultation on the publication of audit quality indicators and the court interprets whether a payment clause was conditional on a matter completing.

Register of overseas entities to launch this Summer

Last week we reported that draft Regulations had been published setting out certain additional details of the new register of overseas entities.

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.

The Government has now announced that the new register will launch on GOV.UK “this Summer”.

The announcement also confirms that two further sets of secondary legislation will be published soon, as well as a commencement order confirming the start date for the new register.

Once the register goes live, overseas entities that already own land in England or Wales will have six months to register their beneficial owners. Overseas entities looking to acquire land in England or Wales will need to be registered with Companies House before they can obtain title.

Finally, the announcement confirms that the Government intends to publish guidance on GOV.UK over the coming weeks to explain more about the process.

Refreshed venture capital ESG measurement framework launched

ESG_VC, a venture capital initiative supported aimed at helping start-ups understand, measure and implement environmental, social and governance (ESG) improvements, has launched a refreshed measurement framework for ESG matters.

The framework contains an updated set of metrics designed to help venture-backed start-ups understand the key pillars of ESG, measure their ESG performance and identify and implement areas for improvements.

The framework takes the form of a questionnaire that generates an ESG score. It includes measures for (among other things) carbon emissions, circular economy, responsible procurement, parental policy, diversity, staff wellbeing, board oversight and cybersecurity.

The framework is available direct from ESG_VC by registering through the organisation’s website.

QCA publishes NED survey report

The Quoted Companies Alliance (QCA) has published the report of its most recent survey of non-executive directors (NEDs) of small and medium-sized companies (SMEs).

This is the fifth time the QCA has conduct this survey. (The last time was in 2019.) The survey results were gathered in Q2 2022 from 107 small and mid-size quoted companies, the majority of which had a market capitalisation of less than £500m.

The survey covers metrics such as the average salary, as well as the actual and expected average number of monthly working hours, of a quoted SME NED, and the number of NED positions held by a quoted SME NED at any given time.

The survey also asked SMEs where NEDs currently bring the most value. Popular responses included broader business experience (29%), providing checks and balances (24%), improved corporate governance (19%) and long-term vision and planning (16%).

However, respondents also felt that NEDs could deliver more value in terms of long-term vision and planning (40%), valuable contacts with other organisations (32%), broader business experience (22%), investor contacts (20%) and improved corporate governance (18%).

The QCA also asked SMEs what skills they felt their boards currently lack. The responses were interesting, the two main areas being cyber/IT experience (60%) and environmental, social and governance (ESG) knowledge (34%).

The survey asked SMEs what methods they used to evaluate their board’s effectiveness and how frequently they did so. Most companies conducted self-assessment led by their chair or senior independent director (79%), with some using external consultants (17%) and some self-assessing using external software (10%). The majority of respondents conducted an evaluation annually (67%).

Finally, the survey asked SMEs what methods they used to recruit directors. Respondents used a variety of methods, including headhunters (53%), existing contacts (46%), specialist search agencies (36%) and word of mouth (35%). Social media (7%) remains a minority method of recruitment.

For more detailed commentary and statistics, see the survey report.

FRC consults on public audit quality indicators

The Financial Reporting Council (FRC) has published a consultation in which it proposes to require audit firms to publish firm-level audit quality indicators (AQIs). The consultation will be of interest to listed companies and other public interest entities (PIEs).

AQIs are quantitative and qualitative measures of external audit quality designed to indicate a firm’s historical, present or future ability to perform quality audits, as well as provide insights into audit quality when read with other AQIs and relevant context.

Firm-level AQIs are indicators of performance at a “whole-firm” (or audit practice) level. They are distinct from management AQIs (which are, in effect, internal key performance indicators within an individual audit firm) and engagement-level AQIs (which are confidential measures used by audit firms with specific audited entities).

The FRC is not proposing to require audit firms to publish management or engagement-level AQIs.

The purpose of publishing firm-level AQIs is to help users of audit services make an informed choice when selecting an auditor, to enable them to assess firms on a more consistent basis and to facilitate conversations about audit quality.

Certain audit firms that audit 20 or more listed companies have already agreed (on a voluntary basis) to report on 11 AQIs across five areas set out by the Policy and Reputation Group in 2015.

To align with this voluntary reporting, the FRC proposes to apply the new requirements to all firms that audit more than 20 PIEs or at least one FTSE 350 company. Firms would start reporting AQIs when they enter the scope of the Audit Firm Governance Code.

The FRC has asked for views on a range of questions relating to the proposals.

The deadline for responding is 18 August 2022.

Court considers meaning of ambiguous payment clause

The High Court has considered the meaning of a payment clause that referred to completion of the work by a specified date, finding that payment was due even where the matter was not complete by that date.

What happened?

BlackLion Law LLP v Amira Nature Food Ltd and another [2022] EWHC 1500 (Ch) concerned a dispute between a law firm and its client in relation to advice provided on a bond issue.

In 2016, the law firm and the client entered into a general retainer, under which the law firm would provide legal services to the client based on an hourly rate.

The client instructed the law firm to work on a bond issue under this general retainer. In the initial months (from around January 2017), the principal transaction lawyer at the law firm spent considerable hours working on the transaction (643 hours), although in later months she recorded only 65 hours.

By March 2017, the bond issue had still not completed and the lawyer became concerned that it was taking longer than originally envisaged.

Following discussions, the law firm and the client entered into a second, more specific retainer, which stated that:

the [law firm] will charge the [client] a fixed fee of £300,000 ("Fixed Fee") for [Services provided in relation to the bond issue] plus disbursements ("Disbursements") in connection with this Matter, subject to the completion of the Matter by 31 May 2017.” (emphasis added)

The bond issue did not complete by 31 May 2017. In fact, it was aborted.

The law firm ultimately requested payment of its invoices. The client refused, arguing that the words “subject to the completion of the Matter by 31 May 2017” created a condition to payment. In other words, if the matter were not complete by that date, payment would never become due.

The law firm argued that the effect of the words was that, if bond issue completed by 31 May 2017, it would receive the fixed fee and no more. However, if it did not complete by that date, it would receive the fixed fee for work done to that date, but work done after that date would be separately chargeable.

What did the court say?

The court agreed with the law firm.

The judge said that the contract wording was ambiguous. The words "subject to" did introduce an element of conditionality, but it was not clear which part or parts of the preceding clause they qualified. As a result, using established principles of contractual interpretation, the judge looked at the factual matrix to try to understand the words.

In doing so, the court asked which interpretation would be more consistent with business common sense, ultimately favouring the law firm’s interpretation. The judge based this decision on several factors, including the following.

  • The client already knew what the law firm was charging. There was no expectation that lawyers working on a bond issue would be paid solely on a contingency basis.
  • By the end of April 2017 – around a month before the second retainer was finalised – the law firm had accrued £385,000 of fees, representing more than 90% of the law firm’s time at that point.
  • By that point, it was clear to all concerned that the bond issue would be difficult to complete. It was not likely that a small law firm, with all its cash-flow needs, would tie up a huge proportion of its available human resources on a project to be paid only if it was successful.
  • It made no commercial sense whatever for the law firm to agree to a contingent arrangement under which it would be paid far less than its recorded time so far if the bond issue succeeded by 31 May 2017, but nothing at all if it failed or completed successfully after that date.

What does this mean for me?

This case illustrates very well how important context can be when reading a contract.

It is not unreasonable to say that the words above – “subject to the completion of the Matter by 31 May 2017” – do at first glance seem to suggest that the fee would be paid only if the bond issue completed by that date. But that made little commercial sense in the context of the parties’ arrangement.

It is important to remember that the courts do not always have flexibility to interpret contracts in this way. A judge can take the context of a contract into account only if the wording is unclear or ambiguous. If the contract, when interpreted using ordinary language, is clear and unambiguous, it will mean what it says, however uncommercial the result may seem.

If the contract is not clear, however, the courts will look at the rest of the contract, the wider context and circumstances and business common sense to work out what it means. This often produces the right result, but it can be an unpredictable exercise.

The upshot of this is simple: when drafting a commercial contract, it is important to ensure the drafting is clear and accurately reflects the parties’ intentions.