Corporate Law Update
- One of the exemptions from publishing a prospectus on a public offer of securities will be widened from 21 July 2018
- The Government publishes an update on board appointments for women and urges further action by FTSE 350 companies
- The court refuses to allow a member of a company to bring a derivative claim where the company was dormant and alternative remedies were available
The maximum size of a public offer of securities that a company can make without publishing a prospectus will increase from 21 July 2018 under new regulations published by HM Treasury.
What is the position now?
Currently, when a company wishes either to offer its shares to the public or to admit its shares to a regulated market, it must produce a prospectus setting out specific information. However, in some cases, a company can take advantage of an exemption from producing a prospectus.
One exemption relates to the maximum size of the offer within the European Economic Area (EEA).
Currently, an issuer does not need to publish a prospectus for a public offer of securities if the maximum price payable on the offer throughout the European Economic Area (EEA) is €100,000 or less (calculated over a 12-month period).
In addition, and somewhat oddly, an offer is also exempt if the total offer size within the EEA is less than €5 million (again, calculated over a 12-month period). Historically this has caused some confusion, as the second exemption appears to subsume the first exemption entirely.
What is changing?
From 21 July 2018, the new regulations change these exemptions, and the position will become a little clearer:
- If the total offer size throughout the EEA is less than €1 million (calculated over 12 months), the offer will fall completely outside the EU prospectus regime and the issuer will not need to produce a prospectus in the EEA in order to offer its securities to the public.
- If the total offer size throughout the EEA is €1 million or more, but less than €8 million (again, calculated over 12 months), the offer will not fall automatically outside the EU-wide regime. However, individual EEA states are able to exempt the offer under their own domestic regimes.
The UK has chosen to do this. So, an issuer will not need to publish a prospectus to offer its securities in the UK if the total offer size throughout the EEA is less than €8 million.
However, other EEA states may choose not to apply this higher threshold. Before making an offer of between €1 million and €8 million, therefore, an issuer should check whether the offer will be exempt in each other EEA state into which it is proposing to offer securities.
In summary, from 21 July 2018, the position will be as follows:
|Less than €1 million
(Across EEA, calculated over 12 months)
|€1 million or more, but less than €8 million
(Across EEA, calculated over 12 months)
|Offer exempt||Offer exempt in the UK
Check domestic law of each other EEA state in which issuer is offering securities
The FCA has confirmed separately that it intends to update its Prospectus Rules to reflect the changes made by the new regulations.
It is important to note that these exemptions apply only to the requirement to publish a prospectus for a public offer of securities. An issuer may still need to produce a prospectus if it is seeking to admit its securities to an EEA regulated market (such as the London Stock Exchange Main Market or the NEX Exchange Main Board), in which case it will need to seek advice.
The Department for Business, Energy and Industrial Strategy and the Government Equalities Office have issued a joint announcement, urging FTSE 350 companies to “step up” to meet targets for the number of women on their boards by 2020.
The announcement notes that more women than ever now sit on FTSE 350 boards. 29% of FTSE 100 board positions are now occupied by women, with FTSE 100 companies on track to meet the Government’s target of 33% of all board positions being occupied by women by 2020.
However, FTSE 350 companies are currently projected to fall short. At the halfway point of the project, initiated by the Hampton-Alexander Review, only a quarter of FTSE 350 board positions are held by women, and ten companies still have all-male boards. To meet the 2020 target, 40% of all FTSE 350 appointments would now need to go to women in the next two years.
The Government has also opened its online portal for FTSE 350 companies to submit their 2018 gender leadership data.
The High Court has refused to allow a shareholder to bring a derivative claim on behalf of a company against one of its directors and an alleged shadow director.
In Goodwin v Cook and others (2018), a Mr Hayes (H) obtained planning permission to develop a plot of land. A Mr Goodwin (G) and a Mr Cook (C) agreed to participate in the venture and formed a company, with each of G and C holding 50% of the shares and serving as a director.
The project failed and the parties made various allegations regarding how the monies contributed to the company were applied.
Ultimately, G brought a derivative claim in the company’s name against C as a director and H as a shadow director. He also applied to be indemnified for his costs out of the company’s assets.
C and H argued that the action should have taken the form of a petition for unfair prejudice, and that G was bringing the action as a derivative claim merely to benefit from an indemnity out of the company’s assets. They asked the court to discontinue the claim.
At the time of the derivative claim, the company was dormant, with no assets or source of income.
What is a derivative claim?
Where a director of a company breaches his duty, any action against him must be brought by the company itself. A company’s members have no direct action against directors for breach of duty.
However, a member can apply to the court to bring a claim against the director on the company’s behalf (a “derivative claim”) under Part 11, Chapter 1, Companies Act 2006 (“CA 2006”). Although the member will have conduct of the claim, any damages awarded will belong to the company.
The court must refuse permission to bring a derivative claim in certain circumstances, which are set out in s. 263(2), CA 2006. These include where a person acting in accordance with the duty in s. 172, CA 2006 to promote the success of the company would not seek to continue the claim.
When deciding whether to give or refuse permission, the court must take into account certain factors, set out in s. 263(3), CA 2006. This gives the court an element of discretion over whether to permit a derivative claim. These factors include the degree of importance a person acting in accordance with s. 172 would attach to the derivative claim.
What did the court say?
The court refused permission to bring the derivative claim. It said that, in view of the company’s financial position and the costs it would be likely to incur, a person acting in accordance with s. 172 would not seek to continue a claim.
This was underscored by the fact that G had other remedies available to him, including a petition for unfair prejudice or a claim for breach of the contract between him and C and H. Given this, the court thought that a person acting in accordance with s. 172 would not attach much importance to the claim.
Derivative actions are not easy to bring. The claimant needs to persuade the court that a reasonable director of the company would be prepared to continue the claim. This depends on numerous factors, such as the strength and size of the claim, the cost of bringing it and how the company will fund it, the likelihood of enforcing any award, and any negative impact on the company in bringing the claim.
In view of this, it will always be difficult to successfully bring a derivative claim on behalf of a dormant and asset-less company.
The decision is also a reminder that an aggrieved member should consider all of his or her remedies before looking to bring a derivative claim. Often alternative remedies will be available, such as breach of contract, breach of the company’s articles or unfair prejudice. A court may well feel that these are more appropriate actions than a derivative claim.