Corporate Law Update

• The Supreme Court finds that a parent company can, in principle, be liable for the acts of its subsidiary where it assumes management and control
• The Government has given some hints as to the next steps in reforming executive pay
• The court sanctioned a scheme to insert a new holding company, even though the shares in the new company would be held in slightly different proportions
• A few other items of interest

Supreme Court says parent companies can be liable for their subsidiaries’ acts

The Supreme Court has delivered its long-awaited judgment in the case of Vedanta Resources plc v Lungowe and others.

The court confirmed that it is possible for a holding company to assume liability for the activities of its subsidiary, provided it assumes a duty of care to third parties in relation to those activities.

In this case, the hearing before the court was principally to decide whether the English courts were an appropriate forum to try claims against Vedanta. The key question was therefore whether there was a real issue to be tried. The court’s decision is not, therefore, conclusive on the point, but it is certainly persuasive.

In essence, the court rejected arguments (based on the previous, high-profile cases of AAA v Unilever plc and Okpabi v Royal Dutch Shell plc) that a parent company assumes a duty of care only in certain circumstances. In particular, Vedanta argued that a holding company could never incur a duty of care simply by providing group-wide policies and guidelines.

The court disagreed and said that a parent company may assume a duty of care where group-wide policies are implemented and administered by the parent.

The judgment is significant for businesses that operate locally through subsidiaries. Our colleagues Lois Horne and Lauren Roberts have published an update on the case, which contains more information on the decision and practical points arising from it.

Government responds on proposals to reform executive pay

The UK Government has responded to recommendations on reforming executive pay made by the Business, Energy and Industrial Strategy Select Committee (a committee of the UK Parliament) in March this year. For information on those recommendations, see our previous Corporate Law Update.

The key points coming out of the Government’s response are as follows:

• The new Audit, Reporting and Governance Authority (the ARGA) (which will replace the Financial Reporting Council (FRC)) will be responsible for monitoring companies’ remuneration reports and section 172(1) statements (statements of how their directors have satisfied their duty to promote the company’s success). This will form part of an expanded and strengthened corporate reporting review regime.
• The Government disagrees with the Committee’s recommendation to require at least one employee representative on a company’s remuneration committee. Although it is aware of some companies that have started inviting employee representatives to remuneration committee meetings, it says this method may not be suitable for all companies.
• The Government does not intend to expand the current CEO pay ratio reporting requirements to all companies with more than 250 employees (rather than simply quoted companies). It wants to monitor the impact of the new requirement when reporting first begins in 2020 before considering extending the requirement to other companies.
• Finally, it has rejected the Committee’s recommendation that all remuneration committees set an “absolute cap” on executive pay. The Government say it is for individual remuneration committees to decide whether to set a cap and for shareholders to have their say through binding votes on the company’s remuneration policy.

The Government has also published a new Q&A document explaining recent changes to the directors’ remuneration reporting regime that came into effect on 10 June 2019. For more information on the changes, see our previous Corporate Law Update.

Court sanctions scheme to insert new holding company

The High Court has sanctioned a scheme of arrangement and capital reduction by a company to insert a new parent, even though not all of the company’s shareholders became shareholders in the parent.

What happened?

In Re Man Group plc, Man Group plc, a UK company, wished to insert a new Jersey holding company (or “topco”). Its issued share capital consisted of 1.6 billion ordinary shares, which were listed on the London Stock Exchange Main Market, and 50,000 deferred shares, which were held by the company secretary.

To insert the new topco, Man Group would implement a statutory scheme of arrangement. As part of this, its entire share capital would be reduced and cancelled, and it would issue new shares to the topco. In return, the topco would issue shares to Man Group’s existing shareholders. Effectively, those shareholders would be “flipping” their shares in Man Group up into the new topco.

Since 2015, it has not been possible for a company to reduce its capital in a scheme of arrangement if the purpose of the scheme is to allow someone to acquire all of the company’s shares. This restriction was brought in to prevent bidders from avoiding paying stamp duty on public takeovers.

The restriction does not apply, however, where a company wishes to insert a new topco, provided two conditions are met. In order for Man Group to use this exception:

• All or substantially all of its shareholders had to become shareholders in the topco.
• They had to hold their equity shares in the topco in the same proportions in which they held their equity shares in Man Group.

For this purpose, the deferred shares in Man Group were “equity shares”. However, they were effectively redundant and so would not be “flipped” up to the topco. That caused two potential issues: the company secretary would not become a shareholder in the topco, and the shareholders would not hold their shares in the topco in the same proportions as they held shares in Man Group. It wasn’t clear, therefore, whether the conditions above would be met.

What did the court say?

The court sanctioned the scheme. The judge noted that the company’s secretary was the only person out of 5,649 shareholders who would not be “flipping” their shares up into the topco. It was clear that “substantially all” of Man Group’s shareholders would become shareholders in the topco.

The trickier problem was the fact the relative holdings of equity shares in topco would not mirror those in Man Group. However, the judge took a pragmatic approach.

The fact that the exception was available where “substantially all” of the shareholders flipped their holdings up meant the legislation could not be contemplating an “exact correspondence of equity shareholdings” in the topco. Indeed, the relative equity shareholdings of those shareholders who were flipping their shares into the topco would remain the same.

The only person who was not participating in the scheme held a “miniscule proportion” of Man Group’s equity shares, and those share rights had “no real value”.

What does this mean for me?

Using a scheme of arrangement to insert a new holding company is a popular way for a business to “re-domicile”. This case shows again that the courts will be pragmatic when examining schemes of arrangement for this purpose.

The same judge had previously examined a similar (albeit slightly different) problem in Re Steris plc (see our previous Corporate Law Update) and found that the decision not to include preference shares in a scheme did not fall foul of the restriction.

A note of caution

There is one additional point to note. The scheme stated that a shareholder would be excluded from the scheme if they resided in a territory into which the new topco was unable to offer or issue shares. Again, the effect of this would be to disturb the correspondence of equity shareholdings.

At the time, Man Group was unable to identify any shareholders who would be excluded, and so the court was happy to sanction the scheme, but on the proviso that, if it turned out that any shareholders were excluded for this reason, Man Group would not register the scheme so as to make it effective and would instead seek directions from the court.

Other items

• Shanghai-London Stock Connect opens. The Government has announced the launch of the new Shanghai-London Stock Connect, a collaboration between the London Stock Exchange and the Shanghai Stock Exchange. Stock Connect allows UK listed companies to sell shares in China from 17 June 2019.
• OECD publishes corporate governance factbook. The Organisation for Economic Co-operation and Development (OECD) has published a factbook comparing the corporate governance frameworks of 49 jurisdictions across the world. The factbook covers all 36 OECD member states, as well as (among others) Brazil, China, India, Russia and South Africa.
• European Commission publishes climate reporting guidance. The European Commission has published new guidelines for companies on reporting on climate-related information. The guidelines are intended to supplement the Commission’s existing non-binding guidelines on non-financial reporting. The new guidelines will be especially useful for quoted companies, which are required to report on greenhouse gas emissions.