Corporate Law Update

A round-up of developments in corporate law for the week ending 22 March 2019.

CMA publishes final no-deal Brexit guidance

The Competition and Markets Authority (CMA) has published final guidance for a situation where the UK leaves the European Union (EU) without a withdrawal agreement (a no-deal Brexit). The guidance sets out how a no-deal Brexit would impact on the way the CMA carries out its role in relation to (among other things) merger control.

The guidance follows a consultation by the CMA, on which we reported in February.

The final guidance clarifies the position for mergers notified to the European Commission before the date on which the UK leaves the EU (“exit day”):

  • As at present, if the Commission refers the merger to the CMA, the CMA will review the merger and the Commission will not be involved.
  • If the Commission issues a decision on a merger before exit day, the CMA will not be able to review the merger unless the Commission’s decision is annulled following an appeal. In other words, the “one-stop shop” will continue to apply.
  • If the Commission does not issue a decision on a merger before exit day, the CMA will be able to review the merger with effect from exit day if the UK thresholds are met. The transaction could lead to notifications under both the UK and EU regimes.

After exit day, parties to a merger will need to assess a merger separately under the UK and EU regimes. In practice, this may require an additional merger control review where any UK aspects of a merger would previously have been dealt with by the Commission. This would inevitably be more time-consuming, costly and administratively burdensome than at present.

The guidance also covers the CMA’s powers and processes for anti-trust and cartel enforcement and consumer law enforcement. It will come into effect on exit day if there is a no-deal Brexit.

Breach of duty and dismissals were not unfairly prejudicial

The High Court examined whether the behaviour of the managing director of a family-owned company was unfairly prejudicial to other shareholders of the company.

What happened?

Waldron and others v Waldron and another centred around a company (the Company) owned by four siblings, who had inherited their respective shareholdings from their parents. Sibling 1 was the Company’s majority shareholder and managing director. Siblings 2 and 3 were minority shareholders and a director and the Company’s secretary respectively. Sibling 4 was a minority shareholder but played no active role in the Company. Another corporate entity (SIG) held the balance of the shares.

At one point, Siblings 1 and 2 (the Company’s directors) identified an opportunity to buy assets from a business that had entered administration. Sibling 1 incorporated a new corporate vehicle, which bought the assets and hired them out to the Company at excessive charges. Siblings 2 and 3 alleged that Sibling 1 had entered into this arrangement in order to extract value from the Company.

In due course, Sibling 1 approached SIG to acquire its shares in the Company. Relations between the siblings subsequently broke down over the proportions in which they should acquire those shares. Sibling 1 wished to acquire all of SIG’s shares, whereas the other siblings argued for them to be distributed in proportion to their existing shareholdings.

This dispute escalated and culminated in Sibling 1 restricting the Siblings 2 and 3’s email access. Siblings 2 and 3 offered a small sum of money to the Company’s IT consultant to provide them with access to Sibling 1’s emails. When Sibling 1 discovered this, he dismissed Siblings 2 and 3 as employees of the Company.

Siblings 2 and 3 claimed that this behaviour amounted to unfair prejudice. Under English law, a member of a company can ask the court for relief if the affairs of the company are being, or may be, conducted in a manner that is unfairly prejudicial to the their interests as a member. Normally, if a court finds that there has been unfair prejudice, it will order a buy-out of the aggrieved member’s shares.

What did the court say?

The court decided not to grant an order.

The judge said that Sibling 1’s behaviour in authorising the lease of assets to the Company did indeed amount to unfair prejudice, because, in proposing the arrangement, Sibling 1 had put himself in a position of conflict of interest. He never sought the Company’s permission for this conflict and so had breached his duties to the Company. The fact that he believed the arrangement would benefit the Company was irrelevant. This breach of duty in turn amounted to unfair prejudice.

But Siblings 2 and 3 had discovered the hire-out arrangements shortly after they had been agreed and had done nothing about it. They had effectively acquiesced in the breach, and the court was not prepared to let them claim now. The same position applied to Sibling 4, who didn’t know about the hire-out but had been content enough to leave her brothers to run the Company.

By contrast, restricting Sibling 2 and 3’s email access did not amount to unfair prejudice. The judge said that, although a company's board is entitled to full information about every aspect of the company's affairs, a director is not automatically entitled to see all e-mails or documents generated in the course of the company's business. There may be circumstances where a managing director or chairman needs to deal with matters confidentially.

Moreover, dismissing Siblings 2 and 3 did not amount to unfair prejudice, because there had been a good reason for their dismissal. They had attempted to bribe a consultant of the company to provide unauthorised access to emails. Their behaviour had been, in the court’s words, “manifestly improper”.

How does this affect me?

For company directors and majority shareholders, the decision is a reminder to consider carefully how the way in which a company’s business is run may impact shareholders, particularly where they may have their own interest in the arrangement. The fact that putting an arrangement in place may benefit a company does not mean it can’t also amount to a breach of duty.

For shareholders who feel that a company’s business is being run to their detriment, the crux of the decision is to act quickly. By sitting on their hands in full knowledge of the issue and allowing it to continue, the shareholders in this case found they had lost their remedy.

It is also a reminder for directors that they may not have unfettered access to all records relating to their company. Whether a director is entitled to see a particular document will always depend on the nature of the document and the reasons for which the director is asking to see it.

Other items

  • Payment practices. The Chancellor has announced in his Spring Statement that the Government intends to require audit committees to review their company’s payment practices and report on them in their annual accounts. The announcement does not specify which companies would be subject to the new requirement. As a matter of law, only companies whose securities are admitted to trading on a regulated market (such as the London Stock Exchange Main Market) are required to have an audit committee, although many other publicly traded companies choose to have one. The new measure would be separate from the existing requirement on large companies under the Payment Practices Regulations to report via a central Government portal on how promptly they pay their invoices.
  • Bribery. A House of Lords Select Committee has published a report on whether the Bribery Act 2010, which came into force on 1 July 2011, is achieving its purpose. The report concludes that the Act is an “excellent piece of legislation”, but that the Ministry of Justice’s guidance on the Act could provide more detailed advice to organisations (particularly in relation to corporate hospitality). Our colleague, Aalia Datoo, explains more in her blog.
  • Modern slavery. The Government has published a summary guide to help organisations identify whether they need to produce a slavery and human trafficking statement under section 54 of the Modern Slavery Act 2015. The summary sits alongside the Home Office’s statutory guidance on transparency in supply chains, which provides more detail on section 54 statements.
  • Financial reporting. The Financial Reporting Council’s Financial Reporting Lab is seeking views on the reporting topics it should select for the next few years. The survey, which takes the form of an on-line questionnaire, is open until 12 April 2019.