Corporate Law Update

This week we look at updated guidance from the Law Society and CLLS on the Market Abuse Regulation and updated guidance from the Investment Association on executive remuneration. We also look at a case where a fledgling company mistakenly applied for Enterprise Investment Scheme certification and was later unable to obtain Seed EIS certification.

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Law Society and CLLS update Q&A on Market Abuse Regulation

The Law Society and the City of London Law Society Company Law Committees have updated their Q&A on the Market Abuse Regulation (the “Q&A”) (This follows ESMA’s update to its Q&A in July.)

The Law Society / CLLS Q&A is not official guidance or advice, but is designed to assist in interpreting areas of uncertainty relating to MAR.

Under article 19 of the Market Abuse Regulation (“MAR”), a person discharging managerial responsibilities of an issuer (a “PDMR”) (such as one of its directors) must notify the issuer and the Financial Conduct Authority (FCA) whenever s/he transacts in the issuer’s financial instruments.

Likewise, a person closely associated with a PDMR (a “PCA”) must notify an issuer and the FCA when transacting in the issuer’s financial instruments.

MAR sets out certain circumstances in which a legal person (such as a company) will be a PCA. This includes in the following circumstances (among others):

  • Where a PDMR of the issuer also discharges managerial responsibilities of the legal person.

    ESMA has confirmed that “discharging managerial responsibilities” in this context means taking part in or influencing the legal person’s decisions to transact in the issuer’s financial instruments.

    The Q&A give the example of a director of an AIM company (company A) who is also a PDMR of another company (company B). Previously, the Q&A had suggested that company B would be a PCA only if the director was company B’s sole director, had a right to appoint a majority of company B’s board, or (broadly) had control over company B’s management decisions.

    In response to ESMA’s update, the Q&A now state that company B will not be a PCA (and so will not need to notify company B or the FCA of transactions in company A’s financial instruments) provided the director recuses her-/himself from board meetings of company B that relate to company A or where company A is discussed and does not “otherwise exert any influence” on company B’s decisions to transact in company A’s financial instruments.

    Although the Q&A give the example of a director of an AIM company, the same principles should apply to any PDMR (whether or not a director) of any issuer (whether admitted to a multilateral trading facility, such as AIM, or a regulated market, such as the LSE Main Market).

  • Where a PDMR of the issuer controls the legal person.

    MAR does not define “control” for this purpose. The updated Q&A suggest the word “control” should be given its ordinary meaning of controlling a “majority of voting rights” in the legal person.

Issuers that are subject to MAR should consider updating their annual process of reviewing PCAs to apply the new tests set out in the Q&A. Boards may also wish to consider dovetailing this review with their annual procedure for authorising directors’ situational conflicts of interest.

Investment Association publishes 2018 remuneration principles

The Investment Association (the “IA”) has published its Principles of Remuneration for 2018 and has written to remuneration committee chairs to advise them of the changes to the Principles.

The Principles set out the views of the IA’s members on the role of shareholders and directors in relation to the level and structure of executive remuneration.

The IA has made the following key changes (among others) to the Principles:

  • Remuneration policies should now focus on promoting “long-term” value creation.
  • A company’s remuneration policy should disclose any discretion its remuneration committee has in relation to a particular incentive scheme.
  • When reporting gender pay-gap and executive remuneration ratios, companies should provide figures in the context of their business and explain why they are appropriate.
  • When consulting with shareholders, companies should disclose the remuneration package as a whole, and not just changes to it.
  • Companies should disclose relocation benefits at the time of an executive’s appointment, should ensure they are in place for a limited period, and disclose that period to shareholders.
  • Companies should clearly disclose the definition of any performance measures linked to annual bonuses and any adjustments made to metrics in the company’s accounts. Bonus targets should be disclosed within twelve months of payment. Where a bonus exceeds 100% of salary, a portion should be deferred into shares.
  • The section on long-term incentive plans (LTIPs) has been updated to deal with performance conditions and vesting thresholds.

Shareholder in dispute with company was not in separate class for scheme of arrangement

In Re Imagination Technologies Group Plc (unreported), the High Court sanctioned a scheme of arrangement of a company in a single court-convened meeting, even though one of the shareholders was in a contractual dispute with the company.

In this case, one of IGP’s customers, Apple, had notified IGP that it would shortly no longer be required to pay IGP royalties. IGP invoked a contractual resolution mechanism for resolving the dispute.

At the same time, IGP initiated a strategic review that culminated in an offer for IGP by Canyon Bridge Capital Partners. The takeover was to be implemented through a scheme of arrangement.

The court had to decide whether Apple constituted a separate class of member by virtue of the dispute between it and IGP. It held that Apple's position was no different from any other scheme shareholder.

In the event, the scheme was approved by 90.84% in number and 99.62% in value, with a meeting turnout of 52% in value.

SEIS form could not be substituted for mistakenly filed EIS form

In Innovate Commissioning Services Ltd v HMRC [2017] UKFTT 0741 (TC), the First Tier Tribunal held that a company could not substitute a Seed Enterprise Investment Scheme (SEIS) compliance statement for an incorrectly submitted Enterprise Investment Scheme (EIS) compliance statement.


EIS was introduced in 1994 to encourage investment in small, higher-risk companies. Broadly, if a company qualifies for EIS then, subject to completing a minimum holding period:

  • a person subscribing for shares in that company can set 30% of the subscription price off against her income tax bill (up to an annual limit of £1 million); and
  •  a sale of those shares is exempt from capital gains tax (CGT).

SEIS was introduced in 2012 to encourage investment in start-up companies. It is broadly the same as EIS, except that income tax relief applies at 50% up to an annual limit of £100,000.

A company cannot apply for SEIS certification if an EIS investment has already been made.

What happened?

Innovate sought SEIS certification. However, it submitted Form EIS1 to HMRC instead Form SEIS1.

On receiving the Form EIS1, HMRC wrote to Innovate asking whether it had intended to submit Form SEIS1 and noting that, if Form EIS1 were authorised, Innovate could not then correct the position.

Innovate did not respond, as it was in the course of changing its address and HMRC’s letter had been delivered to its old address. HMRC proceeded to certify Innovate under the EIS regime.

On learning of this, Innovate’s lawyers wrote to HMRC to ask to substitute Form SEIS1 for the incorrectly submitted Form EIS1. HMRC refused, stating that, once it had certified Innovate under EIS, it did not have the power to accept a substitute Form SEIS1. Innovate brought proceedings.

What did the Tribunal decide?

The Tribunal agreed with HMRC. It followed previous decisions in X-Wind Power Limited v HMRC (First Tier Tribunal), X-Wind Power Limited v HMRC (Upper Tribunal) and GDR Food Technology Limited v HMRC. Each of those cases dealt with similar facts and, in each case, the Tribunal held that HMRC was entitled to refuse to substitute a Form SEIS1 for an incorrectly submitted Form EIS1.

Innovate had argued that its case was different because HRMC had given it advance assurance that it would qualify for SEIS and so was “on notice” that Innovate was seeking SEIS certification. Indeed, HMRC had queried the fact that it had submitted a Form EIS1, rather than Form SEIS1.

However, in the judge’s words, “if the drift of [Innovate’s] argument here is that HMRC have behaved unreasonably or incorrectly in giving the EIS authorisation in response to the Form EIS1 then – even if that is a matter for this Tribunal – I reject it”.

Although HMRC’s view has so far been that the “trigger” for refusing substitution occurs when HMRC certifies a company for EIS, the judge went further. He said this view has no basis in legislation, and the point of no return in fact occurs earlier when the applicant submits the Form EIS1 to HMRC.

(He did suggest that, if a Form EIS1 is submitted without authority, it could be substituted. However, that was not the case here.)

Practical implications

This case serves once again to emphasise the need to be thorough and exercise extreme care when submitting an application for EIS or SEIS relief. The moment the relevant form is submitted to HMRC, it may be too late to reverse the mistake. Even a completely innocent mistake in submitting the wrong form will have the effect of denying the potentially superior tax reliefs under SEIS.