Corporate Law Update

• The Government is consulting on reforms to the UK’s company registration regime, including requiring directors and controllers to verify their identity
• The court orders a general meeting of a company with only one shareholder in order to allow it to remove a director
• Other items of interest

Government consults on reforms to the UK company registry

The UK Government is consulting on reforms designed to enhance the role of Companies House and increase the transparency of UK corporate entities. The consultation has been prompted by on-going concerns about the use of corporate entities by criminals, inaccuracy of information on the register and the abuse of publicly available personal information.

The Government has described the proposals as “the biggest changes to the UK system for setting up and operating companies since the UK company register was created in 1844”.

The 80-page consultation covers five main areas. Although centred around limited liability companies, the paper notes that several of the proposals are principles-based and may apply to a wider range of entities, including overseas companies, LLPs and limited partnerships.

We have set out the key proposals below.

Verifying the identity of individuals

• Directors and persons with significant control (PSCs) would need to verify their identity with Companies House. The process would depend on when the person becomes a director or PSC:
  
  • Where a new company is being incorporated, the identity of its proposed directors and PSCs would be verified as part of the incorporation process. If it is not, Companies House would not incorporate the company.
  • New directors of existing companies would need to be verified before being appointed. A company that appoints an unverified director would commit a criminal offence.
  • New PSCs of existing companies would need to verify their identity on becoming PSCs. Responsibility for this would rest with the PSC, rather than the company. This may or may not be backed by criminal sanctions.
  • Existing directors and PSCs would also need to verify their identity. This would affect around 6.7 million directors and 4.6 million PSCs (although there will be some overlap).
• Verification would be conducted using technological solutions, such as sending a copy of a passport or ID card along with a “selfie” taken on a smartphone. These would then be cross-checked against public sources, such as the electoral roll and sanctions lists.

Directors

• The Government might limit the number of directorships an individual can hold at the same time. The paper recognises there may need to be exceptions to this (such as when creating “shelf companies”), although it does not mention cross-directorships within corporate groups.
• Directors would no longer need to state their business occupation. In addition, directors whose full date of birth still appears on the public register would be able to suppress the “day element”. Finally, directors who change their name as a result of a change in gender would be able to suppress their old name so as to avoid risks of violence or intimidation.

Shareholders

• Companies would need to provide more details of their shareholders to Companies House. For individuals, this would include a residential address and date of birth. (As with directors and PSCs, the residential address and “day element” of the date of birth would not publicly disclosed.)
• A company would need to notify Companies House of a change of shareholder within 14 days. This would be a significant change, bringing shareholder filing requirements in line with those for directors and PSCs. Currently, companies notify changes to shareholders annually.
• Identity verification for shareholders would be optional (with unverified shareholders being flagged on Companies House) or mandatory above a fixed ownership threshold.

PSC filings

• If a company is exempt from keeping a PSC register (because it is traded on one of certain specified securities exchanges), it would need to file basic information to allow searchers to identify its controllers (such as a ticker symbol).
• If a company enters a publicly traded legal entity in its PSC register, it would need to state the market on which it is listed so that Companies House can check that the entity is registrable.

Information on the register

• Companies House would have greater powers to scrutinise filings and request evidence that the information submitted is correct. This includes requiring a company to prove it is entitled to use a given address when it applies to change its registered office address.
• Regulated businesses (such as banks, accountancy and law firms, and company formation agents) would be required to notify Companies House of any anomalies or discrepancies they discover on the company register.

Accounts and financial information

• One proposal would see all company accounts filed in iXBRL format, with Companies House introducing minimum tagging standards to ensure consistency of key financial information.
• There would be a limit to the number of times a company can shorten its accounting reference date. Currently, due to a quirk in the legislation, some companies are using this procedure in order to perpetually or indefinitely extend their accounts filing deadline.
• Companies would be required to file details of their bank accounts with Companies House, including the name of the bank, branch address and account number. The information would not be available on the public register but would be shared with law enforcement agencies.

The Government has asked for responses by 5 August 2019.

Court orders general meeting with quorum of one to remove director

The High Court has ordered a meeting of a company’s shareholders to proceed with a quorum of one.

What happened?

Schofield v Jones involved a company with two shareholders. One held a majority and the other a minority of the company’s shares, and both were also directors. The company also had two directors who held no shares.

In early 2018, the minority shareholder was alleged to have committed certain acts that amounted to serious breaches of his statutory and fiduciary duties as a director of the company. The other directors placed him on garden leave pending an investigation.

In late 2018, the majority shareholder formally asked the company to convene a general meeting to remove the minority shareholder as a director. (Under the Companies Act 2006 (the “Act”), the shareholders of a company can remove a director from office by passing an ordinary resolution. However, it is not possible to do so by way of a written resolution. The decision must be taken at a formal meeting of shareholders.)

Unless a company’s articles say otherwise or it has only one shareholder, the Act prescribes a quorum of two shareholders for a general meeting of a company.

The company sent notice of the meeting to both shareholders, but the minority shareholder refused to attend and claimed that any meeting without him present would be inquorate and invalid.

The majority shareholder applied to court to convene the meeting with a reduced quorum of one. Under the Act, a shareholder can ask the court to convene a meeting in any manner the court thinks appropriate if it would otherwise be “impracticable” for the company to do so.

What did the court say?

The court agreed and ordered a meeting with a quorum of one.

The judge said that, by refusing to attend, the minority shareholder was making it impracticable for the company to convene the meeting. This is not surprising. The court has ordered meetings in the past in similar circumstances, such as in Smith v Butler (which also involved removing a director) and Union Music v Watson (which involved appointing a director).

However, in this case the minority shareholder was in the course of bringing proceedings against the company for unfair prejudice. He had not lodged a formal petition, but his allegations dated back to before the request for a general meeting, and he had circulated a draft petition over two months earlier.

There was case law suggesting that the court should not convene a meeting with a reduced quorum to remove a director while the director is in the course of pursuing an unfair prejudice petition, or that it should at least take the petition into account when deciding whether to convene a meeting.

In this case, the judge was nonetheless prepared to convene the meeting. It was clear that the request had not been made tactically in response to unfair prejudice proceedings.

Importantly, the judge said that, if the court refused to convene the meeting, it would be thwarting the rights of the company’s majority shareholder and effectively “imposing” a director on the company. The judge noted that section 168 of the Act specifically gives shareholders a right to remove a director by ordinary resolution and so reflects a “statutory policy” that they should be able to do so.

What does this mean for me?

This case highlights the difficulties of dealing with an errant director of a closely-held company. If asked to resolve an impasse, a court will be reluctant to allow a shareholder to stymy a meeting by preventing a quorum, but neither will it simply order a meeting without giving deeper thought to the matter.

Parties in a similar situation should ask themselves the following:

• Do the articles set a quorum for general meetings of the company? Normally this will be two shareholders, but it is always important to check.
• If there is no quorum, can the meeting be adjourned? The company’s articles might allow an inquorate shareholder meeting to be adjourned and reconvened with a reduced quorum.
• If not, is the court likely to convene a meeting? Is there a genuine deadlock which was within the shareholders’ contemplation, such that the court should not interfere? Is the real purpose of the meeting to unfairly exclude a director? Has that director been actively participating in the business, or did they recuse themselves long ago? Have they committed any wrongdoing and would their continued participation prove problematic for the company?
• Has the director launched unfair prejudice proceedings? If so, what remedy are they seeking? In this case, the court noted that the director was seeking to be bought out and did not intend to take part in the company going forward, making his removal less controversial.

Other items

• Court upholds rectification of disclosure letter. In April last year, we reported on the High Court case of Persimmon Homes Ltd v Hillier and another, in which the court rectified a share sale agreement and an accompanying disclosure letter to include two missing parcels of land within the scope of warranties given by the seller. The Court of Appeal has now confirmed that decision. The case shows that the courts are increasingly prepared to honour parties’ true intentions where they conflict with the wording of the contract. But the key take-away remains that there is no substitute for thorough due diligence and robust warranty protection.
• New guidance for smaller company audit committees. The Financial Reporting Council (FRC) and the Institute of Chartered Accountants in England and Wales have published a new guide to improve the quality of financing reporting. The guidance is aimed at audit committees of AIM companies and smaller listed companies. It includes a series of questions that audit committee members can ask themselves when planning their company’s reporting cycle.
• Proxy advisers to comply or explain. The Proxy Advisors (Shareholders’ Rights) Regulations 2019 have been published, along with an explanatory memorandum. The Regulations will require proxy advisors to disclose the code of conduct they apply and explain any departures from it, as well as the methodologies they use in arriving at their voting recommendations. The new obligations will apply only to advisors providing services within the European Economic Area (including, for now, the UK or Gibraltar). The principal proxy advisers in the UK are Institutional Shareholder Services (ISS), Glass Lewis and PIRC. The Regulations come into effect in June.