Corporate Law Update

Quick links:

• Government consults on national security investment
• Invoice payment practice data can now be published online
• LSE reminds issuers to get an LEI number
• Guarantee not affected when underlying contract varied
• Government consults on streamlined energy and carbon reporting
• Parker Review report on ethnic diversity published

Government consults on national security investment

The Government has published a consultation on ways to ensure that investments and takeovers do not raise national security concerns in the UK. In the short term, it is proposing to lower the current UK merger thresholds to allow it to examine and potentially intervene in mergers in certain sectors.

We will produce a more detailed update on this consultation in next week’s issue.

Invoice payment practice data can now be published online

The Government has updated its invoice payment practice reporting webpage to note that businesses can now submit the required information online.

Large companies and limited liability partnerships (LLPs) are required to report twice a year on certain information relating to their practice and performance of paying invoices. This includes their standard payment terms, the average number of days taken to pay invoices, and the proportion of invoices paid within and beyond the agreed payment period.

The new “digital service” allows a business to check whether it needs to publish a report and subsequently to publish its information. It also allows members of the public to search against companies and LLPs by name or number to view historic payment practices reports.

LSE reminds issuers to get an LEI number

The London Stock Exchange has published Market Notice N07/17, reminding companies with securities admitted to a regulated market (such as the Main Market) or a multilateral trading facility (such as AIM) that they are required to have a legal entity identifier (LEI) code.

AIM Regulation has issued a similar reminder in the form of AIM Notice 47.

An LEI code is a 20-digit code developed by the ISO. Issuers must have an LEI code to comply with MiFID II and the Market Abuse Regulation. Regulated market issuers have had to have an LEI code since 1 October 2017. The Exchange has said that the deadline for all other issuers is 30 November 2017. A regulated market issuer that does not have an LEI code should apply for one immediately.

In the UK, LEI codes are issued by the London Stock Exchange. Any company can apply for an LEI code by registering on the Exchange’s UnaVista system here.

Guarantee not affected when underlying contract varied

In Maxted and Lorimer v Investec Bank plc [2017] EWHC 1997 (Ch), the High Court held that a guarantee was not affected even though the underlying agreements were amended numerous times.

Under English law, a guarantee is a “secondary obligation” to perform an obligation of some other person (the so-called “secured obligation” or “guaranteed obligation”). Usually the secured obligation is to pay a sum of money, but it could be to undertake some other action.

This means that, if the underlying agreement containing the secured obligation is materially amended, the guarantee falls away and the guarantor is no longer on the hook.

For this reason, a guarantee will commonly state that the guarantor consents to amendments to the secured obligation and that the guarantee will not fall away, even if the secured obligation is amended without the guarantor’s consent. However, previous case law (including Triodos Bank v Dobbs in 2005 and ABP v Ferryway in 2009) has suggested that this kind of clause is not always effective.

What happened?

Three Luxembourg companies each entered into a separate loan with Investec to allow them to buy sites in Germany. In each case, the borrower’s directors (the same two individuals) guaranteed the payment of interest up to a specified limit. The guarantee stated it would not be discharged by any variation or amendment between Investec and the borrower.

Each loan was amended on two occasions to extend its term and to roll up accrued interest. One loan was also amended at one point to increase the facility.

At the time the most recent amendments were made, each guarantor signed a statement confirming that the guarantee continued and waiving his option to obtain independent legal advice.

The borrowers failed to pay the interest. Investec claimed under the guarantee. The guarantors claimed that their liability under the guarantee had fallen away due to the amendments to the loans.

What did the court decide?

The court said the amendments to the loans did not affect the guarantee. They did not create any new obligations, were covered by the variations wording and were within the “purview” of the guarantee.

In any event, the guarantors had consented to the amendments in their capacity as directors of the three borrowers. The court was not prepared to entertain the argument that they had not consented to the amendments, or that they had less knowledge of them, in their separate capacity as guarantors.

Practical implications

This case concerned commercial loans, which are often accompanied by guarantees. However, it is also common to see guarantees outside the financing context. For example, a person who buys from a special purpose vehicle (SPV) or subsidiary may often seek a guarantee from the seller’s parent undertaking to cover potential breaches of warranties, indemnities or restrictive covenants.

To some degree, the decision probably owes much to the fact that the persons approving the amendments on behalf of the borrowers were the guarantors themselves, and the fact that they signed a formal confirmation that the guarantee would continue.

However, the case nonetheless provides comfort that rubric included in guarantees to preserve them against amendments to the secured obligations can succeed. Whether it will have this effect, however, will depend on the nature of the amendments and how substantial they are. Crucially, it will also depend on how the rubric in the guarantee itself is drafted.

Government consults on streamlined energy and carbon reporting

The Government has published a consultation on proposals for a streamlined energy and carbon reporting regime, to be introduced by April 2019. The timing of this consultation is prompted in large part by the impending closure of the CRC Energy Efficiency Scheme (the “CRC regime”).

What happens at the moment?

There are currently numerous regimes that require emissions and energy data to be reported.

• Quoted companies must report on their global greenhouse gas (GHG) emissions and include information on environmental matters in their strategic report.
• Businesses operating in energy-intensive sectors are required to publish data under the EU Emissions Trading System and Climate Change Agreement schemes, although these focus on individual regulated sites, rather than businesses as a whole.
• The Energy Savings Opportunity Scheme (ESOS) requires up to 10,700 “large undertakings” in the UK to conduct energy audits every four years, but this information is not published.

However, the impetus for the consultation is the CRC regime, which requires around 5,200 less energy-intensive organisations to report their energy usage to the Environment Agency for onward publication.

The CRC regime will be abolished in 2019. The Government has said it intends to recover lost revenues through other taxes. However, it has emphasised that mandatory energy reporting remains important and so it intends to plug the gaps created by the closure of the CRC regime.

Who would be caught?

The Government is therefore proposing the following:

•  Quoted companies would continue to report on global GHG emissions and include an “intensity metric” in their annual report. However, they would also need to disclose total global energy use across all energy types.
• Qualifying unquoted companies would be required to report on energy use and GHG emissions and to include an “intensity ratio” in their annual report. (This might also be extended to LLPs.)

The paper proposes three options for deciding which unquoted companies would “qualify” for reporting:

• Those that satisfy two of the following three criteria in a financial year: more than 250 employees; annual turnover over £36 million; annual balance sheet total over £18 million. These mirror the thresholds for a “large company” under the company accounts regime and would likely change from time to time to reflect changes to that regime.
• Those that employ on average more than 250 people in a 12-month period, or have annual turnover over €50 million and an annual balance sheet total over €43 million. This would align the regime with the current ESOS regime.
• Those which are supplied more than 6GWh of electricity per year. This mirrors the qualification criteria under the CRC regime and may help to exclude low-energy users. However, in a sign that lessons were learned, the Government acknowledges that the CRC regime criteria entailed "a degree of definitional complexity" that may be at odds with its intended streamlined approach.

What information would organisations need to report?

The following information would need to appear in a company’s annual report:

•  Energy use and associated emissions. For unquoted companies, this would include on-site electricity and gas use, and energy used in transport, within the UK only. However, quoted companies would be required to report on total global energy use across all energy types.
• Intensity metric. A ratio to assist in comparing businesses. The Government cites models such as reporting tonnes of carbon dioxide equivalent (tCO₂e) by reference to turnover, net income, employee, person-hour, product, floor area or customer.
• Energy savings opportunities and energy efficiency action. This would be a possible additional forward-looking disclosure requirement, but it is not one of the core proposals.

Unquoted companies would be able to report aggregate energy usage figures in tCO₂e, but would need to report separate figures for scope 1 emissions (from own plant, machinery and vehicles), scope 2 emissions (arising out of consumed electricity and gas) and scope 3 emissions (arising out of consumption not within their own control). Scope 3 reporting would remain voluntary for all companies.

The regime would cover familiar emissions (CO₂, methane, nitrous oxide, HFCs, PFCs and SF₆), and companies should be able to rely on established methods and standards of reporting.

The information would sit either in the directors’ report or the strategic report. It might instead sit in a brand-new bespoke report, which could be submitted electronically, possibly in XBRL or iXBRL format.

Responses are requested by 4 January 2018.

Parker Review report on ethnic diversity published

The Parker Review Committee, led by Sir John Parker, has published its final report into ethnic diversity on company boards. This follows the consultation report published in November 2016.

The Committee’s key final recommendations include the following:

• Each FTSE 100 board and FTSE 250 board should have at least one “director of colour” by 2021 and 2024 respectively.
• All FTSE 350 nomination committees should require their HR teams and search consultants to identify and present qualified people of colour for consideration for board appointments.
• FTSE 350 companies should apply the Standard Voluntary Code of Conduct  (which applies to gender-based recruitment) to ethnic minority candidates.
• FTSE 350 companies should develop mechanisms to identify, develop and promote people of colour within their organisations.
• FTSE 350 directors should mentor and/or sponsor people of colour to ready them to assume senior managerial or executive positions internally and non-executive board positions externally.
• Companies should encourage candidates from diverse backgrounds to take on board roles internally, including (for example) at subsidiary level.
• The company’s annual report should set out its board diversity policy and its efforts to increase ethnic diversity within its organisation and at board level.
• Companies should disclose non-compliance with these recommendations in their annual report.

The Committee has encouraged members of the FTSE 350 to adopt its recommendations on a voluntary basis. However, it contemplates that some provisions may be made mandatory if companies make insufficient progress towards the Committee’s goals.