Corporate Law Update: 27 April - 3 May 2024

03 May 2024

This week:

Time limit for warranty claim did not apply while earn-out dispute was being determined

The High Court has held that a time limit for commencing legal proceedings for breach of warranties in a share sale agreement had not begun because the parties were still engaged in a process of agreeing an earn-out payment.

Onecom Group Ltd v Palmer [2024] EWHC 867 (Comm) concerned the sale of the shares in a group of telecommunications services companies by an individual to a trade buyer.

As is customary, the SPA also contained a suite of warranties relating to the target business. It also contained time periods within which the buyer was required to notify the seller of a breach of warranty and bring legal proceedings.

The buyer identified what it believed were several breaches of warranty and notified them to the seller within the notification period. However, the subject matter of the warranty claims overlapped with matters to be taken into account when calculating the earn-out.

The judge held that it was not possible to quantify the warranty claim until the earn-out calculation had been concluded. As a result, the time period for bringing legal proceedings did not begin until the earn-out payment had been calculated.

Read more about the court’s decision that the time limit for a warranty claim did not apply until an earn-out calculation had been determined

Corporate sustainability back on the agenda following European Parliament approval

The European Parliament has resolved to adopt a new formulation of the proposed European Union Corporate Sustainability Due Diligence Directive (CSDDD), which the EU institutions have been negotiating for some years now.

Under the Directive, companies would need to carry out targeted due diligence on their own operations and those of their subsidiaries and partners.

This would include identifying actual or potential adverse impacts on human rights and the environment, taking measures to prevent and mitigate identified impacts, and reporting publicly on those measures.

Companies within scope could be liable to pay compensation if they fail to take mitigating action and, as a result, a person suffers damage.

In March 2024, the Council of the European Union (the Council) blocked a previous version of the Directive adopted by the European Parliament. (Read our previous Corporate Law Update for more information on the Council’s decision to block the CSDDD.)

The Parliament has now approved a more restricted version of the CSDDD.

The revised Directive would apply to EU companies if they have:

  • more than 1,000 employees and net worldwide turnover above €450m (an increase from €300m under the Council’s original proposal); or
  • franchising or licensing agreements in the EU that ensure a common corporate identity and have worldwide turnover above €80m, with at least €22.5m being generated by royalties.

The same tests would apply to non-EU companies, but based solely on turnover generated within the EU. (So, for example, the Directive would apply to a non-EU company and net turnover generated within the EU above €450m.)

The revised Directive will now go back to the Council, which is expected to approve it.

Read the European Parliament’s press release on the approval of a revised CSDDD

Read the European Parliament’s legislation resolution to adopt a revised CSDDD (opens PDF)

FCA consults on changes to Knowledge Base as part of listing rules reforms

The Financial Conduct Authority (FCA) has published Primary Market Bulletin 48, in which it is consulting on certain changes to its Knowledge Base.

The proposals follow the FCA’s consultation on a radical reform of the UK’s listing regime, including collapsing the current “premium” and “standard” segments into a single listing category and removing several requirements, such as shareholder votes on substantial transactions.

You can read more about the FCA’s proposals for reforming the UK’s securities listing regime in our previous Corporate Law Update.

As part of this, the FCA is proposing to delete 9 existing technical notes that would no longer be relevant following the reforms. These include a note on the requirement for a financial track record, as well as dedicated notes for scientific research based, property and mineral companies.

It is also proposing to amend 11 technical notes, principally to remove guidance on certain existing “premium” listing requirements that will be abolished.

This includes guidance on operating an independent business, on the “profits test” (for the purposes of classifying significant transactions), on shareholder votes for significant and related-party transactions, and on working capital statements, profit forecasts and profit estimates in circulars.

Finally, the FCA is proposed to amend its note on cash shells and special purpose acquisition companies (SPACs) to reflect the proposed new requirements for shell companies.

On a separate but related note, the FCA is also consulting on proposed changes to its technical notes on the sponsor regime.

The FCA has asked for comments by 26 May 2024.

Read about the FCA’s proposed changes to its Knowledge Base in its Primary Market Bulletin 48

Takeover Panel updates guidance on private sale processes

The Takeover Panel has updated its statement of practice in relation to a private sale process initiated by a company subject to the Takeover Code.

Practice Statement 31 has historically set out how the Panel will apply the Takeover Code in the context of a formal sale process, a strategic review or public search. However, Practice Statement 31 has not historically dealt with so-called “private sale processes”.

The Panel has now updated Practice Statement 31 to clarify how the Takeover Code will apply to private sale processes. Broadly speaking, it confirms that the Panel will normally grant dispensations from the requirement to publicly name a bidder (under Rule 2.4 of the Code) where a company genuinely initiates a private sale process.

If the Panel does this and the potential target company subsequently voluntarily announces that it has entered a private sale process, it will not need to name any potential bidders that approach the company during the sale process. However, an announcement will be required (under Rule 2.2 of the Code) if a potential bidder is specifically identified in rumour or speculation.

A potential target company would still be able to name a potential bidder if it wishes. In that circumstance, Rule 2.6 of the Code would apply and the potential bidder would be required to clarify its intentions within 28-day “put up or shut up” period.

Practice Statements do not formally bind the Panel but set out informal guidance on the way in which the Panel normally applies the Code. They therefore form an important part of the regulatory framework and market participants must pay close attention to them.

You can read more about the Panel’s changes to Practice Statement 31 in this blog by our colleague, Max Mittasch.

Read Takeover Panel Statement 2024/12 on changes to Practice Statement 31 in relation to private sale processes (opens PDF)

Read the updated Takeover Panel Practice Statement 31