Corporate Law Update

Happy New Year. This week we look at a decision of the Scottish court to require a mandatory offer for Rangers Football Club, a new type of corporate vehicle for assuming insurance-undertaking risks, and new technical notes published by the Financial Conduct Authority.

A reminder to our readers as well that the Second Markets in Financial Instruments Directive (MiFID II) and the corresponding EU Regulation (MiFIR) came into force on Wednesday, 3 January 2018.

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Scottish court orders mandatory takeover offer for Rangers F.C.

The Scottish Court of Session has ordered Mr David King to make a mandatory offer for Rangers Football Club under Rule 9 of the Takeover Code. Mr King must make an offer to acquire the approximately 66% of shares in Rangers F.C. not already held by him and his concert parties.

The Takeover Panel had originally required Mr King to make a mandatory offer in March 2017 after a company and three individuals acting in concert with him acquired 34.05% of Rangers’ shares. For more information, see our update for the week ending 17 March 2017.

In our update for the week ending 21 April 2017, we reported that Mr King had not complied with the Panel’s requirement, and that the Panel had started proceedings in Scotland under section 955 of the Companies Act 2006 to require Mr King to make the mandatory offer.

When the matter came before the Scottish court, Mr King argued that he should not be required to make the offer for two reasons:

  • He did not have the personal funds to do so.
  • The required offer price (of 20p per share) was well below the shares’ market price, meaning that nobody would accept the offer and there would be no utility in requiring an offer be made.

The court disagreed on both counts.

It found that Mr King did control sufficient funds to make the offer. However, even if he hadn’t, it would not have mattered. He would still have been required to make a mandatory offer under Rule 9. The court said that, if lack of funds meant that someone did not need to make a mandatory offer, there was a risk people could structure their financial affairs in such a way as to circumvent the regime entirely.

Furthermore, the fact that the offer price would be significantly below the market price of the shares was also irrelevant. The court said the purpose of the mandatory offer regime is to achieve fair treatment of shareholders, and they would be free to accept or refuse the offer as they see fit.

Mr King has 30 days from the court’s order to make the mandatory offer.

Actions under section 955 are infrequent, as it is rare for a person to fail to comply with an order of the Takeover Panel. This case demonstrates the Panel’s desire to ensure compliance with the Code, even where it may be distinctly unlikely that the resulting mandatory offer under Rule 9 will be taken up.

Protected cell companies created

On 8 December 2017, the Risk Transformation Regulations 2017 (the “Regulations”) came into effect.

The Regulations create a new type of body corporate in the United Kingdom, known as a “protected cell company” (or “PCC”). This is a limited liability company designed to act as a “transformer vehicle” under the Financial Services and Markets Act 2000 (“FSMA”). A transformer vehicle is, broadly speaking, an entity that assumes an insurance contract risk from another undertaking.

Unlike a traditional company, whose assets and liabilities from the various parts of its business are all combined into a single pool, a PCC is divided into a “core” and one or more “cells”. The purpose of the core is to administer the PCC. The purpose of the cells is to assume insurance contract risks. They are separate from each other, and their respective assets cannot be used to satisfy each other’s liabilities.

The PCC itself has separate legal personality, but the core and the cells do not.

A PCC is governed by the Regulations and not by the Companies Act 2006. However, a PCC shares many of the characteristics of a company incorporated and registered under the Companies Act 2006 (a “CA company”). In particular:

  • A PCC has directors, shareholders and a constitution (called an “instrument of incorporation”).
  • It can adopt the Model Articles as its constitution (except to the extent they would contravene any of the specific stipulations that apply to PCCs).
  • It will receive a certificate of incorporation issued by the Financial Conduct Authority (FCA).
  • A PCC has unlimited capacity when contracting with third parties.
  • The statutory duties of a CA company’s directors set out in the Companies Act 2006 also apply to a PCC’s directors. A PCC’s directors are also under a further statutory duty to respect the arrangements made between the PCC’s different cells.
  • PCCs issue shares with a fixed nominal value, can alter their share capital and (subject to certain restrictions) can buy their shares back and redeem them.
  • Shareholder resolutions can be passed at general meetings or by written resolution. The Regulations also specifically preserve the principle of informal unanimous consent (the Duomatic principle) for PCCs.
  • PCCs must prepare accounts under a modified version of the Companies Act accounts regime.

However, there are several respects in which PCCs differ from CA companies, including:

  • A PCC is formed by applying to the Prudential Regulation Authority (PRA) (rather than Companies House), which will refer the application to the FCA. (However, the PCC’s details will be listed on the Companies House register.) Filings relating to a PCC are kept on the FCA’s public register.
  • An application to form a PCC must be accompanied by an application under section 55A of FSMA to carry on a regulated activity, so that it can act as a transformer vehicle.
  • The PCC’s name must end with the words “protected cell company”, “PCC Limited”, “PCC Ltd” or a Welsh equivalent.
  • A PCC cannot be formed as a public company, and so it cannot offer its shares to the public or apply to for its shares to be admitted to trading on a securities exchange.
  • In contrast to a CA company (which can carry out almost any activity), the purpose of a PCC is restricted to acting as a transformer vehicle under FSMA. It is a criminal offence for a PCC to carry on any other activity.
  • A PCC can issue both voting and non-voting shares on behalf of its core, but it can only issue non-voting shares on behalf of its cells. The persons who hold the core shares are, effectively, like the shareholders of a CA company. The persons who hold cell shares are more akin to passive investors (perhaps like the limited partners of a limited partnership).
  • A PCC’s directors have authority to allot shares unless its constitution states otherwise.
  • The PCC’s instrument of incorporation must set out specific details of how its different cells are created and dissolved and interact with each other.
  • Assets can be moved between a PCC’s cells, or between a cell and its core, but generally only under an arrangement between the cells or the cell and the core, or if a cell is dissolved. There is a strict procedure for creating these kinds of arrangement.
  • Distributions by a PCC are made by individual cells by reference to their own respective assets. The core can make distributions, but only if the PCC has no cells.
  • Like a CA company, a PCC can have a seal and can execute deeds and documents by affixing its seal or appointing an attorney. However, it can also execute deeds and documents by a single director, with no requirement for a witness.
  • When a PCC enters into contracts, it must state “clearly and unambiguously” whether the PCC is entering into the contract on behalf of its core or a specific cell (or a combination). The contract must also contain specific rubric relating to the liability of the core and/or any cells.
  • A PCC can change its name or registered office without shareholder approval.
  • A PCC can amend its constitution by ordinary resolution (unless its constitution requires a higher threshold), but any proposed amendment to its constitution requires the FCA’s consent.
  • A PCC must hold annual general meetings (AGMs), unless it specifically elects not to do so.
  • If a PCC holds AGMs, any director appointments must be made at that meeting. Otherwise, the directors can appoint other directors from time to time. A director of a PCC can be removed by ordinary resolution without giving the director special notice.
  • In general, the restrictions on transactions between a company and its directors (and their connected persons), payments for loss of office, and loans and quasi-loans do not apply to PCCs. However, a transaction between a PCC and one of its directors (or an associate of that director) is void if it exceeds the directors’ powers in its constitution.
  • The PSC regime does not apply to PCCs.

FCA publishes new technical notes

Following its recent consultations, the FCA has published the following new and updated technical notes as part of its Knowledge Base:

  • UKLA/TN/102.1 on financial information and track record when applying for premium listing
  • UKLA/TN/103.1 on the independent business requirement when applying for premium listing
  • UKLA/TN/209.3 on Listing Principle 2 (dealing with the FCA in an open and cooperative manner)
  • UKLA/TN/302.2 on applying the class tests in Listing Rule 10
  • UKLA/TN/420.2 on cash shells and special purpose acquisition companies
  • UKLA/TN/422.3 on the concessionary route to listing for scientific research-based companies
  • UKLA/TN/426.1 on the new concessionary route to listing for certain property companies
  • UKLA/TN/427.1 on the concessionary route to listing for mineral companies