Corporate Law Update

A round-up of developments in corporate law for the week ending 19 October 2018.

This week:

Government issues no-deal Brexit guidance on corporate matters

The Government has published a further 29 technical notices on the position if the UK leaves the European Union (EU) without an implementation deal (a so-called “no-deal Brexit”). Two of these notices relate to matters of corporate law.

The first notice deals with structuring a business in the event of a no-deal Brexit. The note raises the following points in particular:

  • Overseas companies that are incorporated in the European Economic Area (EEA) but operate branches in the UK would be subject to the same filing requirements as non-EEA companies.

    This affects primarily EEA companies that are required to prepare accounts under the law of their home country, but which are not required to deliver them to a public registry or to have them audited. Under a no-deal Brexit, these companies would be required to prepare and file accounts that comply with the Companies Act 2006 (as applied to overseas companies), rather than simply file accounts already prepared under their home country’s laws.
  • UK citizens may face restrictions on their ability to own, manage or direct a company registered in the EU (depending on the sector and state in question). This is principally because the EU principle of freedom of establishment would no longer apply to UK citizens.
  • UK companies and limited liability partnerships (LLPs) with their “central administration” or “principal place of business” in an EU member state may find that their limited liability is no longer recognised in that state. This would be the case principally in EU member states that apply the “real seat” doctrine to corporate entities (such as Germany).
  • Cross-border mergers involving a UK company or LLP would no longer be possible. Organisations that have already begun a cross-border merger would need to complete it before the UK leaves the EU. Those currently planning or proposing a cross-border merger will need to initiate the procedure sufficiently in advance to ensure that it completes before exit day.
  • Finally, it would no longer be possible to register European companies (SEs) or European Economic Interest Groupings (EEIGs) in the UK. UK members of EEIGs would no longer be permitted to participate in EEIGs unless their EEIG contract specifically allows them to. Should there be a no-deal Brexit, the Government intends to put in place specific legislation to convert UK-registered SEs and EEIGs into a “new UK corporate structure” following exit day.

The second notice deals with company accounting and audit. It raises the following points in particular:

  • Some exemptions from preparing individual UK company accounts would no longer be available. For example, at the moment, a dormant UK subsidiary may be able to avoid the need to prepare accounts if its group is headed by an EEA company. In a no-deal scenario, this exemption would apply only if the company’s group is headed by a UK company.
  • UK businesses with a branch operating in an EU member state would need to comply with the applicable accounting and reporting requirements in that state. Compliance with UK requirements might no longer suffice.
  • UK companies listed on an EU market may need to provide additional assurance to the authority in the relevant EU member state that their accounts comply with International Financial Reporting Standards (IFRS).
  • Audits of EU businesses seeking to raise capital by issuing shares or debt securities on a UK regulated market (such as the London Stock Exchange Main Market or the NEX Main Board) would need to be undertaken by an auditor registered with the Financial Reporting Council.
  • Conversely, audits of UK businesses seeking to raise capital by issuing shares or debt securities on a regulated market in an EU member state following Brexit will need to be undertaken by an auditor registered as a “third country auditor” in that state.

At this stage, the notes are intended purely as advance guidance. The Government is yet to publish legislation dealing with the specific points above, and the position may change depending on the outcome of negotiations between the UK and the EU27.

Other new notices released by the Government cover matters such as the status of existing free-trade agreements, chemicals (including biocidal products, organic pollutants and pesticides), climate change, consumer rights, geo-blocking on-line content, providing professional services, rail transport and safety, sanctions, trading gas and electricity, and waste shipments.

Court sanctions takeover scheme and provides for “missing shareholders”

The High Court has sanctioned a scheme of arrangement for the takeover of biotechnology company Vernalis plc by the UK arm of US group Ligand Pharmaceuticals Inc.

The scheme followed a conventional structure, under which all of the shares held by Vernalis’ shareholders were acquired by Ligand and Vernalis was subsequently re-registered as a private company. Each shareholder received a fixed cash sum for each share acquired.

Of interest was the fact that, although the scheme was overwhelmingly approved by the shareholders who attended the meeting to sanction it, overall turnout was low: less than 4% of shareholders attended. This was in part because the addresses Vernalis held for around 1,600 of its shareholders were out of date, with the result that communications to those shareholders were routinely returned.

The court has discretion whether or not to sanction a scheme. Normally a court will carefully scrutinise low turnout when deciding whether to give its sanction. In this case, the court was prepared to sanction the scheme: it had been advertised in a national newspaper, and the low turnout at the scheme meeting was in keeping with low turnout at the company’s recent AGM.

However, to avoid any potential “blot” on the scheme, the court ordered Vernalis to make arrangements to allow any of the uncontactable shareholders to be paid the price due to them should they turn up later. It therefore required Vernalis to set up a bank account containing the purchase proceeds due to untraced shareholders and to keep that account open for 12 years (or less, if the court so decides in the future).

The order and decision are another demonstration of how the court is willing to act flexibly and pragmatically to give effect to genuine commercial arrangements.

BEIS consults on ethnicity pay reporting

The Department for Business, Energy and Industrial Strategy (BEIS) has launched a consultation on a potential new regime to require employers to report on pay discrepancy across ethnicity. The consultation applies to England, Scotland and Wales and derives from findings by the Labour Force Survey that, generally speaking, ethnic minority groups earn less per hour than white employees.

Rather than proposing a specific regime, the consultation seeks views on how an ethnicity-based pay reporting regime should operate. However, it also states that the Government believes “it is time to move to mandatory ethnicity pay reporting”, and so it should be seen as more than the Government merely mooting an embryonic idea.

Questions on which BEIS is seeking views include:

  • Should employers disclose a single pay-gap figure comparing ethnic minority pay against white employee pay? BEIS notes that this would have the advantage of ease of communication, and it would mirror the existing gender pay-gap reporting regime. However, it would also simplistically conflate all ethnic minorities into a single grouping, which would prevent differentiation between different ethnic groups.
  • Alternatively, should employers disclose pay-gap figures using “standardised ethnicity classifications”? BEIS notes that this would provide more granularity. However, it would still involve a degree of conflation, and too much granularity may result in individuals being identified, particularly at smaller organisations.
  • Should information be disclosed based on fixed sum bands (BEIS cites Baroness McGregor-Smith’s suggestion of £20,000 bands), or on quartiles? BEIS notes that using quartiles would mirror the methodology under current gender pay-gap reporting. We note that it would also mirror the methodology for quoted companies that are required to publish a CEO pay ratio.
  • Should employers be required to publish a narrative and an action plan alongside their data? This would explain the reasons underlying the ratios and the steps the employer intends to take to reduce any pay gap. This is not currently required under the gender pay-gap reporting regime, although some employers provide this information voluntarily.
  • What size of employer should be subject to the new regime? BEIS has suggested that only organisations employing 250 persons or more should be required to report ethnicity pay-gap information, in line with the threshold under the gender pay-gap reporting regime.

The consultation also touches on difficulties involved in obtaining information on ethnicity for the purpose of pay-gap reporting. This includes not only inherent difficulties with defining different ethnicities, but also the fact that employees themselves determine with which ethnicity they identify, and they are not legally required to select any ethnicity. This potentially makes ethnicity data subjective and unrepresentative.

In this regard, BEIS has asked for views on:

  • how ethnicity self-reporting rates could be improved; and
  • whether standard industry ethnicity classifications should be used, or whether employers should determine the classifications on which to base their pay-gap reporting.

This touches on one of the biggest challenges the Government will face in implementing any ethnicity pay-gap reporting regime. The ultimate goal must presumably be to address and eliminate pay discrepancies based on the ethnicity of employees as perceived by the employer, rather than as indicated by employees themselves. It may be difficult to achieve this using solely ethnicity data provided by employees.

BEIS has requested responses by 11 January 2019.

FCA consults on Brexit changes to Handbook

The Financial Conduct Authority (FCA) has launched a "first consultation" on proposed changes to its Handbook (and its Binding Technical Standards (BTS)) to accommodate the UK’s withdrawal from the European Union (EU).

The first consultation is designed purely to address issues arising simply as a result of Brexit itself. The majority of the proposed amendments are therefore designed simply to amend and update references to the EU and the European Economic Area (EEA), EU legislation, institutions and concepts.

The FCA intends to launch a “second consultation” in the Autumn dealing with changes resulting from the various Brexit-related statutory instruments that will be made under the European Union (Withdrawal) Act 2018, a handful of which have already been made and many of which have been issued in draft for comment.

The proposed changes would come into effect on exit day (currently 11:00 p.m. UK time on 29 March 2019), unless the UK and EU agree an implementation period. If that happens, the changes the FCA will make to its Handbook and BTS will depend on the negotiations during that period.

Usefully, the FCA refers to the plan published recently by the Treasury to give the FCA and other regulators “temporary transitional powers” to ensure a smooth transition. The FCA states in its first consultation that it does “not expect firms, regulated entities providing services within the UK’s regulatory remit and other stakeholders to prepare now to implement the changes from exit day”.

The FCA has asked for responses to the first consultation by 7 December 2018.

Other items

  • The Competition and Markets Authority (CMA) has launched a market study into the statutory audit market. The review follows the CMA’s study in 2013, which resulted in various new measures. However, the CMA feels that concerns remain, particularly in relation to competition and audit quality. The review will focus on (among other things) choice of audit firm, difficulties involved in switching auditor, and whether companies are incentivised to choose an auditor that will produce challenging performance reviews.
  • The Financial Conduct Authority (FCA) has published a discussion paper on the disclosure of climate change risks by listed companies. The FCA notes that, to date, issuers have not adopted a consistent approach to disclosure. It seeks views on whether the existing regime for climate change disclosures goes far enough. It has requested responses by 31 January 2019.
  • The European Securities and Markets Authority (ESMA) has published its 2017 annual report on prospectus activity in the European Economic Area (EEA). The report notes that prospectus approvals across the EEA have increased by 1.9% from 2016, ending a “decade-long decline”, and the number of prospectuses passported from one EEA state to another increased by 2.6%. It also notes that 91% of prospectuses were drawn up as a single document, and 74% related to non-equity securities.