Corporate Law Update

This week:

• The Government proposes new powers to fine directors and other senior managers for “cold calls” made by their organisation
• The court allows the trustees of an employee benefit trust to sell off the trust’s assets, even though the trust deed specifically prohibited it
• The European Fund and Asset Management Association (EFAMA) publishes a revised version of its Stewardship Code for asset managers

Government consults on director liability for cold calls

The Government has published a consultation in which it is proposing to impose direct liability on directors of companies that make and send nuisance calls and text messages.

Direct marketing by phone or text message is not illegal in the United Kingdom. However, to do this, organisations must follow rules set out in the Data Protection Acts 1998 and 2018 and the Privacy and Electronic Communications (EC Directive) Regulations 2003 (the “PECR”).

The Information Commissioner’s Office (ICO) already has the power under the PECR and surviving provisions of the Data Protection Act 1998 to fine companies that make unsolicited marketing communications by electronic means (including by phone) up to £500,000. Between 2015 and 2017 alone, it issued 27 fines totalling £5.7 million, but of these, 15 are still unpaid.

Recovery is hampered by the fact that directors of an errant company can simply dissolve the debtor company, then start a new company with a new name. This process is known as “phoenixing” and is not uncommon in various industry sectors.

Under insolvency and companies legislation, directors who act to the detriment of a company or its creditors can face disqualification, even if their company is dissolved. The Insolvency Service has previously used this power to penalise directors for carrying on unsolicited marketing communications.

However, the ICO currently has no power to impose penalties on a wayward company’s directors.

The paper published by the Department for Digital, Culture, Media and Sport proposes two options:

• Make no change and rely on the current ability for the Insolvency Service to seek disqualification orders for implicated directors.
• Give the ICO the power to impose financial penalties of up to £500,000 on persons in positions of responsibility within organisations (including directors who have since resigned). This power would apply not only to directors, but to anyone involved in the management or control of the organisation in question.

The consultation is open from June to August 2018.

The paper is the latest in a series of proposals by the Government to impose direct liability on directors where recovery against a company is not possible.

In March 2018, the Department for Business, Energy and Industrial Strategy published a consultation on whether directors of a holding company should be personally liable in certain circumstances if a subsidiary sold by the holding company later goes into liquidation or administration.

And in April 2018, HM Revenue & Customs announced it was seeking views into ways to tackle taxpayers who abuse the insolvency regime to avoid or evade tax, including by introducing a new power to transfer certain tax liabilities to a company’s directors and officers.

Court allows trustees to sell shareholding despite restriction in trust document

The court has granted the trustees of an employee benefit trust permission to sell a controlling stake in a company, even though the trust deed specifically restricted it.

What happened?

In South Downs Trustees Limited v various individuals, the shares in a holding company were owned roughly 73% by an employee benefit trust (EBT) and roughly 27% by the group’s executive directors. The EBT had been formed as part of a management buy-out to hold shares in the group.

In 2017, the EBT received an unsolicited offer for its shares in the holding company. After taking financial and legal advice, the trustees of the EBT decided that it was in the best interests of the beneficiaries of the trust to sell the shares.

The problem was that the trust deed stated specifically that the EBT was not permitted to transfer or dispose of the beneficial interest in its shares in the holding company if it would result in the EBT ceasing to have control over the holding company. This appeared to prevent the EBT from selling its 73% holding pursuant to the offer.

However, section 57(1) of the Trustee Act 1925 allows the court to make an order giving the trustees of a trust the power to sell or dispose of trust property if they do not have that power in the trust deed.

In order to make an order of this kind, the court must be comfortable that it is “expedient” for the trustees to enter into the disposal and that the disposal could properly be regarded as the management and administration of the trust property.

The trustees of the EBT applied to the court for an order under section 57(1).

They also applied to the court for an order “blessing” the disposal so as to minimise any challenge to it. Under English case law (most notably, Public Trustee v Cooper), trustees can seek the court’s blessing on a decision they have made if that decision is “particularly momentous”.

What did the court say?

The court was satisfied that the sale was expedient, as its timing was “advantageous”. Without delving too deeply into the financial merits of the proposed sale, the court noted that the capital sum that would be received on the sale was “very substantial when compared with the amount of income received over four years”, and was attractive even over longer periods of income receipt. It found that the very significant benefits from the sale far outweighed any other considerations.

The court therefore granted an order to the trustees under section 57(1) to sell the shares, even though the trust deed prohibited the sale of a controlling stake.

The judge also decided that the proposed sale was “momentous”, as it would ultimately lead to the EBT being wound up, and so blessed the sale.

Practical implications

The case doesn’t break any major ground. These kinds of issues have been considered before.

However, the case does reiterate the point that it will not always be possible to restrict the actions trustees can take in relation to trust property. Circumstances may change and the trustees of a trust may form the view that they should take a particular course of action, but they are not expressly authorised to do so (or, indeed, as in this case, are prohibited from doing so).

In these circumstances, trustees may nonetheless be able to override restrictions in the trust deed with the sanction of the court.

EFAMA publishes revised stewardship code

The European Fund and Asset Management Association (EFAMA) has published a revised version of its Stewardship Code. EFAMA first published the Code in 2011 as its Code for External Governance.

The Code sets out principles to assist primarily European asset managers with monitoring and engaging with their investee companies and with voting on resolutions at meetings of those companies.

Like the Financial Reporting Council’s Stewardship Code, the EFAMA Code operates on a “comply or explain basis”. However, the Code recognises that asset managers will need to apply “good judgment, rather than prescription”.

The revised Code adds a new section setting out general expectations of asset managers. Other changes include the following:

• Asset managers’ policies for engaging with their investee companies should include specific details on monitoring investee companies’ business strategy, risk management, environmental and social concerns, corporate governance, and performance and capital structure, as well as for managing conflicts of interest.
• Where asset managers decide not to adopt a policy for engagement, they should give a clear and reasoned explanation for that decision.
• As well as raising issues with investee company boards, asset managers should consider voicing concerns through investee companies’ advisers or by intervening jointly with other investors.