Corporate Law Update: 26 March - 1 April 2022

01 April 2022

In this week’s update: A director was not liable for an unauthorised promotion because she believed it had been approved, the Takeover Panel publishes two new notes to advisers, PIRC publishes its 2021 Shareholder Voting Guidelines, the FCA is consulting on adopting the updated UKSEF 2022 taxonomy and it was unclear whether a contractual amendments clause prohibited oral modifications to a contract.

Director not liable for unauthorised financial promotion she believed had been approved

The Court of Appeal has held that a director who had been “knowingly concerned” in an unapproved investment communication was not liable, because she believed the communication had been approved by an FCA-authorised person.


FCA v Ferreira [2022] EWCA Civ 397 was an appeal from a case we covered in June 2020, known as FCA v Skinner and others. For more information on that case, see our previous Corporate Law Update.

In short, in that case, two directors of a company – a Mr Skinner and a Ms Ferreira – had permitted the company to communicate an invitation to invest in securities in the company as part of a retail offering to raise capital.

Under section 21(1) of the Financial Services and Markets Act 2000 (FSMA), it is a criminal offence for a person, in the course of business, to communicate an invitation or inducement to engage in investment activity (unless an exemption applies). In short, subscribing for shares in a company constitutes investment activity, and seeking equity investments from the public will invariably involve a communication within section 21.

Section 21(2) of FSMA states that section 21(1) “does not apply” if the person making the communication is authorised by the Financial Conduct Authority (FCA), or if the content of the communication has been approved by an FCA-authorised person.

The invitation was approved by Leigh Carr, a chartered accountant engaged by the company in connection with the fundraising. Leigh Carr was not authorised by the FCA to approve the invitation.

The company raised £3.6 million but ultimately entered into administration with a severe deficit.

The FCA brought proceedings against Mr Skinner and Ms Ferreira under section 382 of FSMA. That section allows the court to make a restitution order against anyone who has been “knowingly concerned” in a breach of (among other things) section 21(1), requiring them to pay compensation.

In response, the individuals claimed that, although they may have been “concerned” in the breach, they had not “knowingly” been so, because they had believed that Leigh Carr had the appropriate permission to approve the communications and had in fact done so.

What did the High Court say?

The High Court found that Mr Skinner and Ms Ferreira had been knowingly concerned in the breach. It was enough that they had known that invitation had been made. The fact that they may not have known that Leigh Carr was not authorised was no defence.

In part, the High Court based its decision on the way that section 21(1) is structured and, in particular, how that structure differs from section 19 of FSMA and its predecessor, section 3 of the Financial Services Act 1986 (the FSA 1986).

It said that, as set out, section 21(1) contains an “absolute prohibition” on communicating invitations and inducements and says nothing about whether a communication has been approved. Section 21(2) disapplies that prohibition if the communication is made or approved by an FCA-authorised person, but it does not form part of the prohibition itself. All that was required was for Mr Skinner and Ms Ferreira to have knowledge of the acts contravening the prohibition, not whether an exemption was available.

Ms Ferreira appealed the High Court’s decision, claiming it was wrong in law.

What did the Court of Appeal say?

The Court of Appeal agreed with Ms Ferreira and overturned the High Court’s decision.

In short, the judges felt that the difference in structure between what was section 3 of the FSA 1986 and what is now section 21(1) of FSMA was “purely one of style and not substance”.

Indeed, the Court of Appeal drew attention to sections 57 and 58 of the FSA 1986, which were the direct forerunners of section 21(1). Those sections had been drafted half-way between the formulations now adopted by sections 19 and 21(1) FSMA, respectively.

Although structural changes had been made when replacing sections 57 and 58 with section 21(1), there was no evidence supporting a change in the interpretation of the legislation. In fact, the Court of Appeal drew more similarities between the two sections than the High Court had.

The Court of Appeal was also unsympathetic to other reasons given by the High Court for its decision, including that introducing an element of knowledge into all of the exemptions could produce a significant burden for prosecutions.

As a result, Ms Ferreira’s appeal succeeded.

What does this mean for me?

This instinctively feels like the right decision in the end.

Although the parts of FSMA that disapply section 21(1) sit in a separate subsection, they are in reality bound up in the same, simple concept: a communication inviting or inducing someone to engage in investment activity (such as acquiring shares) must either be approved by an FCA-authorised person or fall within one of the exemptions from the regime.

To separate these two concepts so as to take into account knowledge for one part but to disregard it for the other is peculiar and breaks that unity of concept.

The High Court’s decision made for uncomfortable reading for company directors looking to embark on a fundraising. The Court of Appeal’s decision will certainly alleviate concerns. However, directors should still check that a person approving a communication by their company has permission from the FCA to do so to avoid the possibility they may be acting recklessly when making the promotion.

 Steps an organisation can take to do this include the following:

  • Check the firm’s correspondence. Authorised firms are required to state that they are regulated by the FCA and provide their registration number on all correspondence.
  • Consult the FCA register to check a firm’s authorised status.
  • If you are still in doubt, ask for a copy of the firm’s FCA authorisation.

Takeover Panel publishes two new notes for advisers

The Takeover Panel has published two new notes to advisers. The Panel’s notes are designed to provide guidance to persons advising a party to a takeover on certain aspects of the Takeover Code (the Code).

The first new note covers Rule 2.8 statements (namely, a statement under Rule 2.8 of the Code that a party does not intend to make an offer for a company that is subject to the Code).

Note 2 on Rule 2.8 sets out the circumstances in which a Rule 2.8 statement can be set aside. These differ depending on whether a third party has announced a firm intention to make an offer before the Rule 2.8 statement is made.

To assist advisers, the Panel has prepared examples of Rule 2.8 statements to be used where:

  • no third party has announced a firm intention to make an offer; and
  • a third party has announced a firm intention to make an offer.

The note also reminds advisers that a person who is considering making a Rule 2.8 statement should consult the Panel Executive in advance, and that the Rule 2.8 statement must be published through a Regulatory Information Service (RIS).

The second new note contains template wording that can be used when providing information on Rule 9 of the Code to shareholders in connection with a so-called “whitewash” vote.

The wording can also be used to provide information on Rule 9 to potential investors of a company that is seeking admission to trading, if a person (or a group of persons acting in concert) will be interested in shares carrying 30% or more of voting rights following admission.

The note clarifies that the wording will need to be adapted to the particular circumstances in each case.

Finally, the note reminds advisers that the Executive should be consulted where there is doubt as to whether a group of persons will be considered to be acting in concert.

The Panel’s other notes to advisers can be found here.

PIRC publishes 2022 voting guidelines

Pensions & Investment Research Consultants Ltd (PIRC) has published its UK Shareholder Voting Guidelines for 2022. The guidelines set out PIRC’s views on best practice in relation to matters such as board structure, remuneration policy and environmental and social issues, and how PIRC is likely to recommend that investors vote.

The guidelines are available directly from PIRC for a fee of £425.

Key changes since the 2021 guidelines are set out below.

  • PIRC will now recommend voting against the re-election of the nomination committee chair where a FTSE 100 company has not met the Parker Review target of one director from an ethnic minority on the board. It will continue to recommend abstaining where a FTSE 250 company fails to disclose its progress towards the target. (For more information on the Parker Review targets and current progress, see our previous Corporate Law Update.)
  • PIRC continues to recommend that directors of FTSE 350 companies be subject to annual re-election. It now also explicitly recommends that directors of other companies be subject to re-election at the first AGM after appointment and then at intervals of no more than three years.
  • The chair should lead the task of assuring the company's strategy and implementation are “Paris-aligned” or explain why are not. Directors should consider alignment with the Paris Agreement and (if relevant) the Glasgow Climate Pact in all board decisions and find opportunities to achieve “net zero”. PIRC will recommend voting against re-election of the chair where this is not evident.
  • PIRC also expects companies to set out a climate scenario (distinct from an overall environmental policy) that deals with keeping warming within a 1.5°C scenario with science-based policies and targets. It also reminds companies to be alert to “greenwashing”.
  • The guidelines also clarify that PIRC expects issuers to disclose scope 3 greenhouse gas emissions.
  • From 2022, PIRC expects climate to be “fully embedded” in a company’s risk management. The guidelines set out three areas companies should consider and 13 questions directors should ask themselves when making climate-related disclosures.
  • PIRC expects directors and auditors of extractive companies to state whether the company’s financial statements are Paris-aligned and, if they are not, explain why. PIRC will recommend voting against the accounts and/or re-election of the auditors where this is not done.
  • PIRC will not support bonuses for directors where a business has made substantial redundancies due to the Covid-19 pandemic. (This adds to the existing list of Covid-related circumstances in which PIRC will decline to support bonus payments.)

FCA consults on updating UKSEF taxonomy for annual financial reports

The Financial Conduct Authority (FCA) has published Consultation Paper CP22/5, in which it is seeking views on creating a more up-to-date electronic format for issuers’ annual financial reports.

Under Rule 4 of the Disclosure Guidance and Transparency Rules (DTR), an issuer with securities admitted to trading on a UK regulated market (such as the London Stock Exchange Main Market or the AQSE Main Market) must publish an annual financial report within four months of its financial year-end.

Under DTR 4.1.14R, an issuer must prepare its annual financial report using the single electronic reporting format, more commonly known as “ESEF” and, following Brexit, now increasingly referred to in the UK as “UKSEF”. In particular, an issuer must mark up parts of its report in iXBRL format using an acceptable taxonomy.

The FCA has previously confirmed the taxonomies that can be used for this purpose. (For more information, see our previous Corporate Law Update.) These include UKSEF 2022.

Earlier this year, the FRC announced that it had issued version 2 of UKSEF 2022.

The FCA is now proposing to update its rules to require issuers who proposed to tag their reports using the UKSEF 2022 taxonomy to use version 2 instead of version 1.

Under the proposals, the FCA would accept reports marked up using UKSEF 2022 version 1 until (and including) Friday, 29 April 2022. From Tuesday, 3 May 2022, the FCA would accept reports marked up using UKSEF 2022 only if they employ version 2. (Monday, 2 May 2022 is a public holiday in the UK and so it will not be possible to submit accounts on that day.)

The FCA is also proposing to permit issuers to use the ESEF 2021 taxonomy for financial years beginning on or after 1 January 2021 but before 1 January 2022. Previously, the FCA had been unable to legislate for this taxonomy, as it had not yet been adopted by the European Union.

The FCA has asked for comments on its proposals by Friday, 8 April 2022.

Wording of contractual amendments clause was ambiguous and required further scrutiny

The High Court has found that the meaning of a clause purporting to regulate amendments to a contract was ambiguous.

Integral Petroleum S.A. v Bank GPB International S.A. [2022] EWHC 659 (Comm) concerned a debt facility agreement. Among other things, the agreement stated that “any term of the Finance Documents may be amended or waived with the agreement of the Borrower or Lender in writing”.

The borrower subsequently alleged that the lender had agreed orally to an extension of time for repaying the facility. The lender had argued that the clause cited above was a “no oral modification” (or NOM) clause and so prevented an oral amendment of the kind the borrower had suggested.

Following the Supreme Court’s decision in Rock Advertising Ltd v MWB Exchange Business Centres Ltd [2018] UKSC 24, which overturned decades of previous case law, the English courts will uphold a NOM clause that is clear and unambiguous.

However, in this case, the High Court said it was not clear whether the purpose of the clause was to prevent oral modifications, or rather to permit oral modifications provided that they were later evidenced in writing.

The court was being asked only to give summary judgment, and so it was unable to reach a definitive conclusion on the meaning of the clause. The judge felt that there was a sufficiently arguable case that the clause did not prohibit oral modifications and so a full trial was required.

We will wait to see whether the case proceeds to trial.

In the meantime, the judgment is a reminder to ensure that any contractual restrictions on, or procedures for, amending a contract are clear and unambiguous.

For other useful suggestions in relation to contractual amendment provisions, see our previous Corporate Law Update in which we discuss the Rock Advertising case.

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