Corporate Law Update

We also mention briefly various updates from the worlds of private equity and capital markets, including the latest report on private equity companies’ compliance with the Walker Guidelines, new model documents for early stage investments from the BVCA, new policy guidance on virtual-only AGMs, and a response to a recent consultation on the AIM Rules. We intend to report on some of these in more detail next week.

Quick links: 

• Court examines scope of indemnity in SPA

• Amendments to the Takeover Code

• Other items

Court examines scope of indemnity in SPA

In First Names (Jersey) Limited and another v IFG Group plc [2017] EWHC 3014 (Comm), the High Court examined the scope of an indemnity given by a seller on a share sale and purchase.

What happened?

First Names (Jersey) Limited (“FNJ”) runs a corporate and trust management services business. In July 2012, IFG Group (“IFG”) sold all of the shares in FNJ to First Names Group Limited (“FNG”).

Under the share sale and purchase agreement (the “SPA”), IFG agreed to indemnify FNG and its group against all losses and liabilities relating to “any litigation, arbitration or other dispute resolution process, or administrative or criminal proceedings or any investigation or enquiry by any Authority arising from facts, matters or circumstances existing prior to Completion”.

The SPA contained standard limitations on IFG’s liability. In particular, it stated that IFG would not be liable to FNG under the indemnity unless:

• the claim was for £500,000 or more (the “de minimis threshold”);
• FNG notified IFG of the claim within 24 months of the sale of FNJ; and
• FNG commenced legal proceedings in respect of the claim within four months of that notice or, if the claim was contingent, within four months of the day when it became an actual claim.

In addition, the SPA required the notice of claim to state, “in reasonable detail, to the extent such information is available at the time, the event, matter or default giving rise to the [claim] and an estimate of the amount claimed”.

One of FNJ’s principal services to clients was to second its own employees to act as directors of client companies. Before the sale to FNG, FNJ had done just this for one of its clients: Ignition Romanian Land Fund #1 Limited (“Ignition”), a company that invested in land in Romania. Three of FNJ’s employees had been appointed directors of Ignition.

In due course, Ignition went into liquidation. The liquidator notified FNG that he might seek to begin proceedings against the three directors for alleged breach of duty. FNJ decided that it was obliged to fund the directors’ defence of the claims against them and, if they were found liable, indemnify them.

In consequence, FNG claimed against IFG under the indemnity in the SPA to recover the amounts that FNJ might have to pay out to the three directors. It served its claim notice in June 2014 just within the 24-month time limit in the SPA. However, importantly:

• the claim notice did not include an estimate of the amount claimed; and
• at the time of the notice, Ignition’s liquidator had not begun proceedings against the directors.

The liquidator brought proceedings against the directors in March 2016. FNG began legal proceedings to recover under the indemnity in the SPA in June 2016, within the four-month time period in the SPA.

IFG refused to pay out under the indemnity, giving the following reasons:

• FNJ was not legally obliged to indemnify the directors. As the indemnity in the SPA caught only legally binding liabilities, it did not bite in this instance and IFG was not obliged to pay out.
• The indemnity applied to litigation and other proceedings. The notice of claim could not be valid, because the liquidator had not yet commenced any proceedings. If and when it did become valid, it would be outside the 24-month period and therefore time-barred.
• The SPA required the notice of claim to state the amount claimed. The notice did not do this and so was not valid.
• The trigger for bringing the indemnity claim (namely when the claim ceased being “contingent” and became “actual”) was the outcome of the proceedings against the directors, and not the point at which the liquidator brought proceedings. The claim was therefore premature.

What did the court decide?

The judge held that IFG was liable to pay out under the indemnity.

He found that, as a matter of Jersey law, it was an implied term of each director’s employment contract that FNJ would indemnify that director against any liability (except for liability towards FNJ itself).

The judge also said it was not necessary for the liquidator to have begun proceedings against the directors in order for FNG to claim. Under the terms of the SPA, FNG had the right to give notice of a “contingent claim”. In fact, although the liquidator hadn’t brought proceedings, he had notified one of FNG’s senior employees that it was possible he may seek to bring a claim against the directors. This was enough to engage the indemnity in the SPA.

Thirdly, he held that the notice was not invalid merely because it failed to state the amount claimed.

IFG had argued that the words “to the extent such information is available at the time” in the SPA applied only to the words “the event, matter or default”, and not to the words “an estimate of the amount claimed”. This would mean that the notice had to specify an amount to be valid. However, the judge did not think this accorded with commercial sense or a plain reading of the words.

The judge also rejected IFG’s argument that the notice must have been required to state the amount claimed in order to decide whether the de minimis threshold had been met. He said that this was merely a statement of IFG’s ultimate liability, and not a pre-condition for serving a notice of claim.

Finally, the judge held that the point at which the claim became “actual” was when the liquidator began proceedings against the directors. This was because FNJ became required to indemnify the directors at the point proceedings began, and so this is when the indemnity in the SPA became engaged.

What did the court decide?

The judge held that IFG was liable to pay out under the indemnity.

He found that, as a matter of Jersey law, it was an implied term of each director’s employment contract that FNJ would indemnify that director against any liability (except for liability towards FNJ itself).

The judge also said it was not necessary for the liquidator to have begun proceedings against the directors in order for FNG to claim. Under the terms of the SPA, FNG had the right to give notice of a “contingent claim”. In fact, although the liquidator hadn’t brought proceedings, he had notified one of FNG’s senior employees that it was possible he may seek to bring a claim against the directors. This was enough to engage the indemnity in the SPA.

Thirdly, he held that the notice was not invalid merely because it failed to state the amount claimed.

IFG had argued that the words “to the extent such information is available at the time” in the SPA applied only to the words “the event, matter or default”, and not to the words “an estimate of the amount claimed”. This would mean that the notice had to specify an amount to be valid. However, the judge did not think this accorded with commercial sense or a plain reading of the words.

The judge also rejected IFG’s argument that the notice must have been required to state the amount claimed in order to decide whether the de minimis threshold had been met. He said that this was merely a statement of IFG’s ultimate liability, and not a pre-condition for serving a notice of claim.

Finally, the judge held that the point at which the claim became “actual” was when the liquidator began proceedings against the directors. This was because FNJ became required to indemnify the directors at the point proceedings began, and so this is when the indemnity in the SPA became engaged.

Practical implications

As with most cases involving claims under SPAs, this decision turns very much on its facts. Courts are not reluctant to strike out claims that do not comply with the limitations in an SPA, as recent cases such as Ipsos SA v Dentsu Aegis Network Limited and Teoco UK Ltd v Aircom Jersey 4 Ltd show.

However, limitations of liability in an SPA are exclusion clauses and a court will interpret them narrowly. Although cases such as Wood v Capita Insurance Services show that this is not a foregone conclusion, they will normally look to resolve any ambiguity in favour of a buyer. It is therefore important for a seller to draft its limitations as clearly and explicitly as possible.

What is interesting about this case is that the court was prepared to uphold the notice of claim even though, at the time it was served, there were no formal proceedings against the directors. The High Court has previously held (in Laminates Acquisition Co. v BTR Australia Ltd) that a notice of claim must state that the buyer is in fact making a claim, not that it may make a claim.

However, the judge’s decision in this case is arguably consistent with Laminates. Although the matter underpinning FNG’s claim against IFG was itself contingent and might never have arisen, FNG had made it clear that it was actually bringing a claim in case it did arise. This sufficed for the court.

Amendments to the Takeover Code

On 11 December 2017, the Takeover Panel published:

• a response to its July 2017 consultation on extending the Takeover Code to asset sales in certain circumstances and on certain other matters; and
• a response to its September 2017 consultation on revising the regime for making statements of intention in relation to a takeover bid.

For details of those consultations, please see our updates for the week ending 21 July 2017 and the week ending 22 September 2017 respectively.

In summary, the Panel is making the following changes to the Takeover Code coming out of the two consultations. The changes will come into effect on Monday, 8 January 2018.

Intention statements

• An offeror will need to state its intentions for a target’s research and development functions and for material changes to the skills or functions of its employees and management. (This includes if it intends to change the proportion of workers with certain technical skills or particular qualifications.) It will also need to state the likely repercussions on the target’s headquarters.
  
  These statements will be in addition to the existing requirement on an offeror to state its intentions for the target’s future business, employees and pension schemes.
• An offeror will need to include these statements both in its offer document (as at present) and in an announcement of a firm offer (its “Rule 2.7 announcement”). It will not need to include these statements when it announces a possible offer (a “Rule 2.4 announcement”).
• An offeror will have to wait 14 days from its Rule 2.7 announcement before posting its offer document, unless the target’s board agrees otherwise.
• If an offeror makes a post-offer undertaking in connection with an offer, it will be required to supply the Panel with annual progress reports on how it is fulfilling that undertaking and publish those reports through a regulatory information service (RIS).
• If an offeror makes a post-offer intention statement in connection with an offer, it will be required to confirm to the Panel, within 12 months of completing the offer, whether it has acted in accordance with that statement and publish that confirmation through an RIS.

Asset sales

• Broadly, an offeror will not be able to buy “significant assets” from a target in circumstances where it would not have been able to make an offer for the target’s shares.
  
  This includes, for example, within six months of making a statement that it does not intend to make an offer (a “Rule 2.8 statement”) (unless it specifically reserves the right to do so in that statement) or within 12 months of its offer being withdrawn or lapsing.
• For these purposes, assets will normally be “significant” if they yield a calculation of 75% of more under tests based on the proposed purchase price for the assets, their value and the profit attributable to them. (This is higher than the 50% originally proposed.)
• An announcement by a target that it has agreed to sell all or substantially all of its assets and to return cash to shareholders would, if made in competition with an offer, be a “quantified financial benefits statement” requiring approval by the target’s accountants and financial advisers.
• If a target is in an offer period and then begins discussions to sell all or substantially of its assets, any information it provides to the proposed asset purchaser must also be provided to any other offeror or potential offeror.

Other key changes

• If a target seeks shareholder approval for any action that might frustrate an offer, it will need (among other things) to send a circular to its shareholders containing certain information and to obtain independent financial advice on the terms of the arrangement.
• Certain restrictions on using social media will be relaxed.

Other items

• PERG publishes 10th annual report. The Private Equity Reporting Group has published its 10th annual report on compliance with the Walker Guidelines. The Guidelines are a voluntary code setting out measures to promote disclosure and transparency by private equity firms and portfolio companies. Compliance has fallen again this year, but the percentage of sample firms achieving a “good” or “excellent” rating has increased. We intend to cover this in more detail next week.
• BVCA updates model documents. The British Venture Capital Association has updated its model documents for early stage investments. The documents (which include a shareholders’ and subscription agreement and articles of association) are designed for used in series A funding rounds. The changes are relatively minor and relate predominantly to non-cash consideration on a drag-along and new provisions to deal with PSC regime requirements.
• Investment Association policy on virtual-only AGMs. The IA has published a new position statement on annual general meetings held solely by virtual means. The IA believes that virtual-only AGMs are not in the best interests of members. The statement notes that IA members are unlikely to support amendments to a company’s articles to permit virtual-only AGMs, and that IVIS will “red-top” any company that does this. The statement does not explicitly apply to general meetings other than AGMs. It follows recent statements by Institutional Shareholder Services (ISS) that it will not support virtual-only general meetings.
• London Stock Exchange publishes results of consultation on AIM Rules. The Exchange has published AIM Notice 49, which sets out the feedback and outcome of its recent consultation on potential changes to the AIM Rules for Companies to ensure AIM remains a competitive market. We intend to cover this in more detail next week. Meanwhile, please see our update for the week ending 14 July 2017 for more details on the Exchange’s original consultation.