Corporate Law Update

Quick links:

• CMA updates guidance on merger processes
• Final guidance on failure to prevent tax evasion
• Shares with no dividend rights are “ordinary share capital”
• AIM disciplinary proceedings can be heard in private

CMA updates guidance on merger processes

The Competition and Markets Authority (CMA) has published updated guidance for businesses relating to the merger process in the UK. The CMA has made three principal changes:

• New additional guidance on when the CMA will typically impose an initial enforcement order to prevent merging companies from integrating in a way that could affect the outcome of an investigation or the CMA’s ability to introduce any necessary measures.
• Changes to the merger notice form to reduce the information to be provided to the CMA by eliminating unnecessary questions and to make the form easier to understand.
• Changes to the CMA’s guidance on its merger intelligence function to clarify, in particular, when merging companies that do not propose to notify a transaction should submit a briefing note.

Final guidance on failure to prevent tax evasion

HM Revenue and Customs has published final guidance for commercial organisations on the new criminal offence of failing to prevent the facilitation of tax evasion (the “Guidance”).

Under the offence, a commercial organisation that falls within the regime (a “relevant body”) will be liable if a person associated with it commits a tax evasion facilitation offence. An organisation’s only defence is to put “reasonable procedures” in place to prevent tax evasion. This is similar to the offence in section 7 of the Bribery Act 2010 of failing to prevent bribery, the only defence to which is to have “adequate procedures” in place.

The Guidance sets out suggestions that commercial organisations may consider when adopting reasonable procedures. In many respects, the guidance is remarkably similar to that issued by the Ministry of Justice in relation to the offence of failing to prevent bribery.

In particular, the Guidance is predicated on six “guiding principles”. These are practically identical to the six “principles” set out in the Ministry of Justice guidance on failing to prevent bribery and also echo similar themes set out in the Home Office guidance on reporting on transparency in supply chains under section 54 of the Modern Slavery Act 2015. The six principles are:

• Risk assessment
• Proportionate procedures
• Top-level commitment
• Due diligence
• Communication and training
• Monitoring and review

The Guidance contains suggested procedures, guidance on legal terminology employed by the new offence, case studies, and a helpful suggestion on reasonable procedures for lower-risk SMEs.

The Guidance comes into operation on 30 September 2017, the same day on which the new offence comes into force. Organisations that have not already started should begin putting in place policies and procedures designed to serve as “reasonable procedures”.

Although they serve different functions, organisations that have already put in place procedures designed to prevent bribery or to address modern slavery may be able to use these procedures as a helpful starting point, although organisations will need to conduct a review of tax risks. HMRC has emphasised, for example, that merely adding the word “tax” into existing procedures will not be sufficient.

Depending on the way in which these procedures have been implemented in practice, organisations might also consider integrating aspects of their anti-bribery and corruption (ABC), anti-modern slavery and anti-tax evasion procedures (e.g. due diligence) into a single architecture, perhaps (where relevant) alongside anti-money laundering (AML) and sanctions procedures, to ensure a harmonised and comprehensive model.

Separately, the Law Society has published guidance on how the new offence may impact solicitors, particularly when instructing specialists, counsel and overseas lawyers. The guidance includes a number of illustrative scenarios that solicitors may encounter in practice.

Shares with no dividend rights are “ordinary share capital”

In HMRC v McQuillan and another [2017], the Upper Tribunal found that shares with no right to participate in dividends qualify as “ordinary share capital” for the purposes of entrepreneurs’ relief.

Entrepreneurs’ relief allows individuals to pay a lower rate of capital gains tax on a “qualifying business disposal”. This includes a material disposal of shares in a company.

To qualify for relief, an individual must (among other things) have held at least 5% of the “ordinary share capital” of the company, and been able to exercise at least 5% of the company’s voting rights by virtue of that holding, for at least one year leading up to the disposal. “Ordinary share capital” refers to shares that do not carry a right to receive a dividend at a fixed rate.

In this case, two individuals each held 33% of a company’s ordinary shares. However, at one point, loans made to the company by other shareholders were capitalised in exchange for the issue of a large number of redeemable shares with no right to vote or receive dividends.

The effect of this was that, if those redeemable shares counted as “ordinary share capital”, the two individuals would no longer satisfy the 5% shareholding requirement for entrepreneurs’ relief.

The individuals argued that the shares carried a right to receive dividends at a fixed rate of 0% and so were not ordinary share capital. HMRC argued that the shares carried no right to receive dividends, so the concept of a fixed rate could not apply and the shares were ordinary share capital.

The Upper Tribunal agreed with HMRC. It said that shares carrying no right to receive dividends cannot be regarded as having a right to a fixed dividend of 0%.

The case is a reminder that it is important when structuring share issues, capitalisations and other capital reorganisations to take care to ensure that any changes do not impact adversely on the availability of entrepreneurs’ relief for individuals.

AIM disciplinary proceedings can be heard in private

In ZAI Corporate Finance Limited v AIM Disciplinary Committee of the London Stock Exchange plc [2017], the Court of Appeal decided that a nominated adviser (nomad) did not have a right under the AIM Rules to require disciplinary proceedings against it to be heard in public.

The AIM Disciplinary Procedures and Appeals Handbook (the “Rules”) state that the AIM Disciplinary Committee (“ADC”) will “usually conduct hearings in private”, but that a nomad “has the right to ask for [a] hearing to be conducted in public” at least five business days before the hearing.

The ADC brought proceedings against ZAI. ZAI asked for the proceedings to be heard in public, but the ADC refused. ZAI brought an action, claiming it had a right under the Rules to a public hearing and that, once it made that request, the ADC was required to comply with it.

The High Court dismissed ZAI’s claim. ZAI appealed to the Court of Appeal, which also dismissed the claim. In short, both courts said that, whilst a nomad has a right to ask for proceedings to take place in public, it does not have a right to require the ADC to do this. Both courts felt that the natural language of the Rules gave the ADC discretion whether to conduct a hearing in public or private.
The case is a reminder to nomads and AIM companies alike that, if disciplinary proceedings are brought, the AIM Disciplinary Committee will generally have the final word on how those proceedings are to be conducted.