Corporate Law Update

This week:

• The Law Commission has concluded that electronic signatures are valid and has launched a consultation on further potential reforms
• The Government has published its response to its consultation on insolvency and corporate governance, including on attaching liability to directors of holding companies
• New guidance has been published on how unconnected research analysts can participate in the IPO process alongside connected analysts

Law Commission confirms electronic signatures are valid

The Law Commission (the Commission) has confirmed that formal legal documents (including deeds) can be signed under English law using electronic signatures.

The Commission has acknowledged that “a lack of clarity in the law is discouraging businesses from executing documents electronically when it would be quicker and easier to do so”. It has therefore launched a formal consultation setting out its own findings and proposing further possible reforms. The Commission has also published a useful summary paper.

What does the Commission say?

The consultation paper covers all kinds of electronic signature, from scanned manuscript signatures to digital signatures, email sign-offs and e-signing platforms.

The key points arising from the consultation are as follows:

• In the Commission’s view, electronic signatures are a valid form of signature under English law, and there is no need for any further reform in this respect.
• In particular, an electronic document will be “in writing” for legal purposes if it can be viewed in a legible form on a screen.
• Importantly, the Commission has confirmed that deeds can exist and be executed electronically.
• The paper reminds readers that, according to case law, a name typed into an email will normally be regarded as a signature, but a name that is automatically inserted into an email with no positive action by the sender will not.
• In the Commission’s view, it is not currently possible for a person to witness someone else’s signature unless both persons are physically together in the same location. However, the Commission has proposed changing the law to allow “remote witnessing” via live video link.
• The Commission is also seeking views on whether to replace witnessing for electronic signings entirely with (for example) digital signatures using public key infrastructure (PKI) or a new system under which a witness could rely on an “acknowledgement” by the signatory that he or she executed the document electronically.
• The Commission recommends establishing an industry working group to consider what practical and technical issues are currently inhibiting the use of electronic signatures. This would cover the security and reliability of electronic signatures and inter-operability between e-signing platforms.
• Finally, the Commission has recommended initiating a wider review on whether there is still a place for the concept of deeds in English law in the 21st century.

The Commission has also explicitly endorsed previous guidance issued by the Law Society and City of London Law Society (CLLS) on conducting virtual signings and on signing documents electronically.

The paper does not cover wills or dispositions of real estate, and it covers only documents executed under English law. At this stage, the Commission is simply canvassing views on its proposals, rather than making formal recommendations for legislative reform.

The Commission has asked for comments on the consultation by 23 November 2018.

Practical implications

The consultation is timely. There is a clear desire by many commercial counterparties to use electronic signatures to introduce flexibility when signing documents and to generate cost savings by avoiding physical meetings.

The Law Society and CLLS have previously confirmed that electronic signatures are valid for commercial contracts, and various law firms (including Macfarlanes) now offer the ability to sign documents electronically. However, the take-up on large, commercial transactions has been relatively low to date.

The Commission’s conclusions will hopefully go some way to assuaging these concerns and promoting the use of electronic signatures.

Government responds to insolvency and corporate governance consultation

In March 2018, the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation on proposed reforms to the UK’s insolvency and corporate governance landscape. That consultation included certain significant proposals, including extending liability to the directors of holding companies that sell insolvent subsidiaries. You can read more in our Corporate Law Update for the week ending 23 March 2018.

Following feedback, BEIS has now published its response to the consultation. The key points coming out of the response are as follows.

Liability for directors of holding companies

In its consultation, BEIS had proposed that directors of holding companies could incur personal liability if their holding company sells an insolvent subsidiary, that subsidiary enters liquidation or administration within a “look-back period” of two years beginning with the date of the sale, and the directors could not reasonably have believed that the sale would lead to a better outcome than placing the subsidiary into administration or liquidation.

This was the most significant, and arguably controversial, of the original proposals. We noted previously that this reform raises particular considerations for the private equity and venture capital sectors, where directors appointed by sponsors, who often will not be directors at the “operational” level, could be at risk of incurring personal liability on the secondary sale of a failed investment.

Despite some significant opposition to this proposal, the Government intends to implement it. BEIS says it recognises the “valid concerns of respondents”. It is therefore proposing to introduce measures designed to enable directors to remain confident that a sale will not expose them to liability if they had a “reasonable belief at the time of the sale that the sale would likely deliver a no worse outcome” for the subsidiary’s stakeholders than formal insolvency proceedings.

However, it is not clear how this differs in substance from the original consultation proposal. Indeed, the response states that the Government will “ensure that legislation is properly targeted to bring into scope directors who had no reasonable belief that the subsidiary’s stakeholders would be no worse off as a result of the sale than if the subsidiary entered into administration or liquidation”. This essentially mirrors the wording of the original consultation.

BEIS has, however, confirmed certain changes to its original proposal that will provide some comfort to directors of holding companies:

• The Government will not be introducing a new ability for administrators and liquidators to bring personal actions against holding company directors.
• BEIS will produce a non-exhaustive list of matters that a court must take into account when deciding whether a holding company director was acting reasonably on the sale of an insolvent subsidiary, so giving holding company directors guidance as to what actions they should take.
• The original “look-back” period of two years will be reduced to 12 months.

Dividends

Feedback to the consultation revealed that the UK’s regime for declaring and paying dividends is “complex” and “too backwards-looking”. The Government will explore the case for a comprehensive review of the UK dividend regime with professional groups, including the Law Society and the Institute of Chartered Accountants in England and Wales (ICAEW).

As part of this, the Government will consider introducing a new requirement for companies to disclose their distributable profits in their audited accounts. At present, companies are required by law and accounting standards to state their accumulated profits or losses at financial year-end, but this figure does not always tally with a company’s “distributable profits”.

The Government will also consider whether the current regime, under which dividends can be paid only if a company has distributable profits, should instead be based on a “solvency test”, so that a company could pay a dividend provided it would remain solvent and able to pay its creditors. This would bring the regime closer to the procedure under which a company can reduce its capital out of court.

Finally, BEIS is concerned that companies are consistently paying interim dividends, rather than final dividends, so as to avoid obtaining shareholder approval. It intends to ask the Investment Association to assess how prevalent this practice is and, if necessary, will legislate to require at least one shareholder vote on dividends each year.

Capital allocation

BEIS believes that companies should be disclosing more clearly how they allocate capital resources between shareholders, investment and R&D, rewards for employees, defined-benefit pension schemes and other demands.

If investor pressure and the forthcoming duty to publish a section 172 statement do not bring improvements, the Government will consider legislating to require companies to disclose their capital allocation decisions. This will include measures to scrutinise dividend payments where the company has a pension scheme deficit.

Other items

• Directors’ duties. The Government is going to bring forward proposals to give directors greater access to training and guidance on their duties. It will also consider introducing a requirement for mandatory training for directors of large companies.
• Board evaluations. The Government will ask ICSA: The Governance Institute to convene a representative group to explore ways to improve the quality and effectiveness of board evaluations.
• Group transparency. The Government will consider requiring corporate groups of a “significant size” to provide a group structure chart (or “organogram”) and an explanation of how corporate governance is maintained within the group. The response does not say how these would be published, but feedback suggests they could be included in the group’s annual report. There is naturally an overlap here with existing and forthcoming requirements to comply with or explain against a corporate governance code.
• Redundant companies. The Government will consider streamlining the process for dissolving redundant companies. At the moment, this can be a tedious, time-consuming and sometimes costly process involving striking dormant companies off, winding them up in a voluntary liquidation, or (where possible) pursuing a court process (such as a cross-border merger) that results in their automatic dissolution.
• Investor stewardship. BEIS recognises the need for investors to take a greater role. It notes that the position should improve with the introduction of the revised FRC Stewardship Code, the revised EU Shareholder Rights Directive and (if implemented) proposals by the Department for Work and Pensions to require pension trustees to set out their stewardship policies. Alongside this, the Government will work with investors, regulators and other interested parties to examine how investment mandates can make explicit reference to stewardship and to ensure institutional investors can escalate any concerns about a company or its directors.
• Directors of dissolved companies. The Government intends to press ahead with changes to extend the current director disqualification regime to directors of dissolved companies, so that action can be taken against a director of a dissolved company without having to restore the company to the register first.

New AFME guidance on providing access for unconnected analysts

The Association of Financial Markets in Europe (AFME) and the European Association for Independent Research Providers (Euro IRP) have published joint guidance on involving unconnected analysts in the initial public offering (IPO) process.

Background

In July 2018, the Financial Conduct Authority (FCA) amended its Conduct of Business Sourcebook to address a perceived problem in the process of bringing a company’s shares to market.

The FCA was concerned that investors on an IPO were relying too heavily on analysis produced by the prospective issuer’s own financial advisers (“connected research”) and not on the issuer’s prospectus or independent analysis (“unconnected research”).

Broadly, under the new rules (which are now in force):

• A prospective issuer’s syndicate banks must provide a range of unconnected analysts with access to the issuer’s management by one of two methods.
• Unconnected analysts may be permitted to join connected analysts in communications with the issuer team before connected research is published (Option 1). In this case, the connected research can be published the day after the prospectus is published.
• Alternatively, unconnected analysts can separately be given access to the issuer team and the same information as is given to connected analysts (Option 2). However, in this case, no connected research can be published until at least seven days after the prospectus is published.

These rules apply only to IPOs on a regulated market (such as the London Stock Exchange Main Market), and not on a multilateral trading facility (such as AIM or NEX Growth).

What does the new guidance say?

The guidance sets out how unconnected analysts can register their interest in gaining access to the issuer team, depending on which of the two options above is chosen. In short:

• An unconnected analyst would be required to confirm that it will comply with Market Standard Research Guidelines set out in the guidance. This includes keeping details of the IPO confidential, observing any geographic restrictions that apply to connected research, and holding off publishing any unconnected research before any connected research can be published.
• Under Option 1, the issuer would contact all persons registered on AFME’s “Unconnected Analysts List” and invite them to attend the analyst presentation.
• Under Option 2, the issuer would issue a statement when publishing its registration document setting out how unconnected analysts can communicate with it. It would also notify all persons on the “Unconnected Analysts List”.
• In both cases, an unconnected analyst wishing to participate would need to register its interest with the prospective issuer. The issuer would confirm the request as soon as reasonably practicable and normally within one business day.
• If the issuer is holding in-person meetings, unconnected analysts would generally be given the same rights to ask questions (whether at the meeting or afterwards by email) as connected analysts.
• If the issuer is making materials available without a meeting, it would upload certain materials to a website for unconnected analysts to access. These include the management presentation slide deck and a written note of all Q&A between the issuer and connected and unconnected analysts.