Corporate Law Update

In this week’s update: a new cross-border migration and division regime, changes to the prospectus and market abuse regimes for SMEs, a promise to pay legal fees was not a guarantee, FCA amendments to the Knowledge Base, Handbook and DTR and some FRC announcements on 2020 focus, auditor independence and carbon reporting.

There will be no Corporate Law Update next week. Our next update will be in the New Year. Merry Christmas.

New EU cross-border mergers, divisions and conversions regimes

The European Union (EU) has published a new directive paving the way for companies to migrate from one EU member state to another and to divide their business across different countries.

Directive (EU) 2019/2121 makes changes to an existing EU law – Directive (EU) 2017/1132 (also called the Company Law Codification Directive), which consolidated six different EU company law directives into a single piece of legislation.

Among other things, the Codification Directive contains the parts of EU law dealing with the now much-used cross-border mergers regime, which allows companies in two or more EU member states to merge together under a statutory procedure.

The new Directive, which is now law, does three things.

Cross-border mergers

The existing regime has been amended in several respects, including the following:

  • A company which absorbs another company within its group will no longer need to issue shares as part of the merger.
  • Mergers will no longer be possible for companies that have entered insolvency proceedings.
  • The merger report sent to shareholders will be beefed up to include (among other things) the impact of the merger on future business and shareholders and any valuation difficulties.
  • There will be a new report explaining the impact of the merger on employees.
  • Shareholders who vote against the merger will be given the opportunity to cash out.
  • Creditors who are dissatisfied with the merger will be able to apply to court for protection.
  • There will be new safeguards to ensure a merger does not take place for abusive, fraudulent or criminal purposes or to circumvent law.

Cross-border divisions

There will be a new regime allowing a company registered in an EU member state to “divide” into two or more companies in different member states in one of two ways.

The procedure will function very similarly to the cross-border mergers regime. In particular, companies will need to draw up draft division terms which will be vetted by an independent expert, submit them for shareholder approval, obtain a “pre-division certificate” and register the division publicly. There will be safeguards for shareholders, employees and creditors.

Cross-border conversions

This is perhaps the most exciting change. Under a new regime, limited liability companies will effectively be able to “migrate” between EU member states. The process involves converting from a legal form in one state into the nearest equivalent in another, moving registered office in the process.

Currently, cross-border migrations can be achieved artificially in various ways, including through cross-border mergers or mergers into a European company, or by inserting a new holding company. But these methods do not preserve the continuity of the original entity or truly shift its place of registration.

As with cross-border mergers and divisions, companies will not be able to migrate if they have entered insolvency proceedings. There will be a strict process under which the company must draw up draft conversion terms, prepare reports for shareholders and employees to be vetted by an independent expert, and obtain shareholder and court approval. And, as with mergers and divisions, dissenting shareholders must be offered the option to cash out.

The hope is that the new regime will provide a simpler and clearer procedure for migrating.

What does this mean for the UK?

Like the Codification Directive, the changes do not take effect automatically in UK law. EU member states have until 31 January 2023 to transpose the new measures in their own domestic legislation.

Following the UK General Election on 12 December 2019, which resulted in a significant Parliamentary majority for the Conservatives, it seems all but certain that the UK will have left the EU well before the transposition deadline.

However, if (as seems likely) the EU and the UK ratify their agreed Withdrawal Agreement, the UK will remain subject to the benefits and obligations of EU law during the “implementation period” (or “transition period”) in which it and the EU attempt to conclude their new trading and political relationship. The Withdrawal Agreement envisages this happening before 31 December 2020, as our colleagues Stephen Kon and Jonathan Pratt explain.

If, for any reason, that does not happen, the UK may become formally obliged to adopt the changes, even though they would most likely need to be repealed again once the implementation period ends. If so, during that period, UK companies should be able to benefit from the new procedures.

EU simplifies market abuse and prospectus regimes for SMEs

New laws have come into effect designed to ease the administrative burden for small and medium-sized enterprises (SMEs) with securities on an SME growth market.

Regulation (EU) 2019/2115 (which is being called the “SME growth markets Regulation”) amends three key pieces of EU legislation: the Second Markets in Financial Instruments Directive (MiFID II), the Prospectus Regulation and the Market Abuse Regulation (MAR).

There are currently two SME growth markets in the UK: AIM and the NEX Exchange Growth Market.


The amendments to the Prospectus Regulation take effect from 31 December 2019.

Under the key change, a company whose securities have been admitted continuously to an SME growth market for at least two years will be able to admit securities to a regulated market using a new simplified prospectus disclosure regime (provided it has complied with its reporting obligations). This should in turn reduce the time and expense involved in an SME producing a prospectus.

The changes will also allow non-SMEs to admit their securities to an SME growth market using an EU growth prospectus (and not a full prospectus), provided they are making an offer to the public at the same time and their market capitalisation is below €200 million.

Finally, the new Regulation closes a technical loophole which, in theory, allowed an unlisted company to bring its shares to a regulated market for the first time without publishing a prospectus.

Market abuse

The amendments to MAR take effect from 1 January 2021.

An SME whose instruments are admitted to an SME growth market will not need to provide a written explanation to their national authority when they delay the disclosure of inside information. Instead, they will need to provide an explanation on request.

This relaxed regime will automatically apply to issuers on SME growth markets, unlike other markets, where EU member states can elect whether or not to apply the relaxed regime. (In the UK, the Financial Conduct Authority has chosen to do so.)

In addition, SMEs will no longer need by default to draw up a full insider list if asked to do so by their national authority. Instead, they will need only to draw up a list of persons who have regular access to inside information in the normal course of their duties.

Finally, issuers on all markets will be able to notify dealings by persons discharging managerial responsibilities (PDMRs) and closely related persons within two business days of being notified of the dealing, rather than (as now) three business days of the dealing. This effectively extends the maximum period for public disclosure from three to five business days but eases the burden on issuers.

What does this mean for the UK?

The changes to the Prospectus Regulation will take place before the UK leaves the EU and will become part of UK law.

Whether the changes to MAR become part of UK law depends on whether the UK and EU finalise their new relationship by the current deadline of 31 December 2020 (see previous item above). If they do, the UK will leave the EU the day before the changes come into effect and, although MAR itself will be replicated in UK law, the changes will not (unless the UK specifically adopts them).

If, however, the implementation period is extended beyond the end of 2020, the UK will remain subject to EU law and the changes will make their way into UK law even after the UK leaves the EU.

Promise to pay another person’s legal fees was not a guarantee

The Court of Appeal has held that a promise by an individual to pay his father-in-law’s legal fees was not a guarantee, but rather a primary obligation under contract.

What happened?

Abbhi v Slade [2019] concerned a Mr Singh and his son-in-law, Mr Abbhi. Mr Singh was involved in legal proceedings but unable to pay fees to a solicitor to act for him. At a meeting, Mr Abbhi agreed with a solicitor – a Mr Slade – that, if Mr Slade agreed to represent Mr Singh, he would pay Mr Singh’s legal fees.

While the litigation was ongoing, Mr Abbhi paid Mr Singh’s bills by putting him in funds. However, when the court delivered judgment against Mr Singh, Mr Abbhi stopped paying. Mr Singh subsequently died, leaving an insolvent estate that owed fees to Mr Slade. Mr Slade claimed against Mr Abbhi for payment of those fees.

Mr Abbhi argued that his promise to pay Mr Singh’s fees was a guarantee, because Mr Abbhi had effectively agreed to underwrite any failure by Mr Singh to pay Mr Slade.

Under an old English statute usually known as the Statute of Frauds 1677, in order for a guarantee to be enforceable, it (or a memo of its terms) must be set out in writing and signed. In this case, Mr Abbhi argued, the guarantee was given orally and so was not enforceable.

What did the court say?

The court disagreed. It said that Mr Abbhi’s promise was not in fact merely a guarantee that Mr Abbhi would pay Mr Slade’s fees if Mr Singh did not. Rather, it was a “funding agreement”, under which Mr Abbhi had agreed to pay Mr Slade’s fees “in any event”, regardless of whether Mr Singh could pay.

The court’s decision was not affected by the fact that Mr Abbhi had put Mr Singh in funds to pay his bills (up until judgment against Mr Singh). This had merely been a mechanism for Mr Abbhi’s convenience and to minimise his exposure to being ordered to pay costs.

What does this mean for me?

When agreeing to pay someone else’s liability, it is important to make it clear whether the promise is a guarantee or a “primary obligation” (normally an indemnity). Whilst a guarantee must be in writing, an indemnity need not and can arise orally or by conduct.

Circumstances can also be important in deciding whether a promise is a guarantee or an indemnity. In this case, the judges were clearly swayed by the fact that Mr Abbhi knew Mr Singh could not afford the legal fees, and so it was clear that he would be called on to pay no matter what.

FCA amends Knowledge Base for Prospectus Regulation

The Financial Conduct Authority (FCA) has announced in its Primary Market Bulletin 26 that it has made minor changes to some of the technical and procedural notes in its Knowledge Base to reflect the EU Prospectus Regulation.

The amended notes are PN/901.4 (Eligibility process), TN/205.2 (Publishing unapproved documents), TN/301.2 (Refinancing and reconstructions), TN/522.3 (Disclosing “lock-up” agreements), TN/601.2 (Public offers), TN/603.2 (“Six-day rule”) and TN/622.2 (Collective investment undertaking prospectuses).

In addition, the FCA has deleted technical notes TN/620.1 (Incorporation by reference) and TN/621.3 (Risk factors), as these are now covered by the Prospectus Regulation itself and guidance published by the European Securities and Markets Authority (ESMA).

FCA amends Handbook and DTR

The Financial Conduct Authority (FCA) has published Handbook Notice 72, in which it confirms it has proceeded with amendments to the Listing Rules and to the Disclosure Guidance and Transparency Rules (DTR) it proposed in its 25th Quarterly Consultation (CP19/27).

Specifically, the FCA has amended the definition of the UK Corporate Governance Code in its Handbook Glossary to refer to the 2018 Code and introduced transitional provisions.

Separately, it has amended the DTR to implement the requirement for issuers on regulated markets to publish their annual reports in the European Single Electronic Format (ESEF) from 1 January 2020.

The amendments were made by FCA Instrument 2019/105.

FRC announces areas of focus for 2020/2021

The Financial Reporting Council (FRC) has announced its areas of focus for corporate reporting and audit in the 2020/2021 season. In terms of narrative reporting, the FRC will be examining the effects of the UK’s decision to leave the EU on companies’ disclosures. There will also be an FRC-wide project focusing on climate change disclosures.

At the same time, the FRC’s Financial Reporting Lab has published its Q4 2019 newsletter.

FRC makes changes to strengthen auditor independence

The Financial Reporting Council (FRC) has announced amendments to its Ethical Standard for auditors and new Auditing Standards. The changes are designed to increase the independence of statutory auditors and deal with potential conflicts of interest.

In particular, the revised standards will prevent auditors from providing recruitment and remuneration services and playing any part in management decision-making. Auditors of public interest entities (such as Main Market listed companies) will only be able to provide non-audit services that are closely linked to the audit itself or required by law or regulation.

FRC publishes energy and carbon reporting taxonomy

The Financial Reporting Council (FRC) has published its new taxonomy for reporting under the streamlined energy and carbon reporting (SECR) regime, which came into force for all large and listed companies and large limited liability partnerships (LLPs) on 1 April 2019. The taxonomy is an addition to the existing FRC taxonomies suite. It is not mandatory, but the FRC is encouraging its use.