Corporate Law Update

A round-up of developments in corporate law for the week ending 8 March 2019.

This week:

The Quoted Companies Alliance publishes an analysis of companies that have switched their listing from the Main Market to AIM and vice versa
The European Commission is consulting on non-binding guidelines designed to create a common standard for quoted company directors’ remuneration reports
The High Court orders the executor of an estate to be registered as a shareholder of a company without needing to see a grant of probate
The Takeover Panel has confirmed it will proceed with changes to the Takeover Code to regulate asset valuations published in connection with takeover offers
The Takeover Panel has confirmed it will proceed with changes to the Takeover Code to reflect the UK’s withdrawal from the EU
A few other items of interest

QCA publishes analysis of stock market switches

The Quoted Companies Alliance (QCA) has published an analysis of companies that switched their listing from the London Stock Exchange Main Market to AIM, or from AIM to the Main Market, between 2008 and 2018.

The QCA found that, since 2008, 65 companies have switched from AIM to the Main Market, whilst 56 companies have moved in the opposite direction. As the QCA notes, this is perhaps a little surprising, as AIM is often viewed as a “stepping stone” to the Main Market for many businesses.

However, the overall trend over the ten years is that the number of switches has decreased, with businesses now seemingly content to stick with their chosen market.

Commission consults on common format for remuneration reports

The European Commission is consulting on non-binding guidelines for a standard format for company’s directors’ remuneration reports.

A company incorporated in the UK must include a separate directors’ remuneration report in its annual report if its equity shares are officially listed in the UK or another European Economic Area (EEA) state, or if they are admitted to trading on the New York Stock Exchange or NASDAQ.

The report must set out various figures, including a breakdown of each director’s remuneration and other benefits for the financial year and the company’s policy for remunerating directors going forward. The format of the report is strictly prescribed. In particular, remuneration figures must be set out in a “single total figure table”.

The Commission’s proposed guidelines would set out a pan-European structure for the directors’ remuneration report in the form of tables, splitting share-based remuneration out alongside total remuneration. The guidelines envisage a “self-standing” report with amounts stated gross.

The proposed guidelines would not be legally binding on UK companies (or, indeed, any company), and they would not form part of UK law following the UK’s withdrawal from the European Union. Indeed, UK companies would not be able to adopt the Commission’s guidelines where they are inconsistent with the requirements in UK legislation.

However, if published, they may provide useful guidance to UK companies with operations in the EEA when preparing those parts of their remuneration report over which they have a degree of flexibility, such as any narrative information they choose to include voluntarily.

Court orders executor to be registered as shareholder without grant of probate

The High Court has ordered a company to rectify its register of members to replace a deceased member with her executor before a grant of probate was obtained.

What happened?

The case in question – Ellott v Cimarron UK Ltd – happened some time ago, but the judgment has only just become available.

In October 2017, Cimarron’s sole shareholder died. In her will, she left parcels of her shares to various beneficiaries, including the claimant, whom she had named as her executor.

Under Cimarron’s constitution (which incorporated regulations 29 and 30 of Table A 1985), the deceased’s shares were transmitted to the executor, who was entitled to be registered as Cimarron’s shareholder. However, the deceased shareholder had also been Cimarron’s only director and company secretary, and so Cimarron had been left without any officers to approve the transmission.

The executor applied for probate, but the process of obtaining a grant could have taken up to three months. In the meantime, Cimarron was without management. There was a risk its bank accounts would be frozen, its employees would not be paid and its business would be put in jeopardy.

To avoid this, the executor applied to the court under section 125 of the Companies Act 2006 to rectify Cimarron’s register of members as a matter of urgency to record him as Cimarron’s shareholder. At that point, the executor did not have a grant of probate to prove his entitlement to the shares.

What did the court say?

In the circumstances, the court ordered rectification without a grant of probate. This was helped by the fact that the other named executors in the will (a firm of solicitors) had disclaimed their appointment, and the two other beneficiaries of the will had consented to the application.

In addition, given that Cimarron had no acting officers, the court ordered the executor to make the necessary updates to Cimarron’s register of members. The executor, as Cimarron’s sole shareholder, could then appoint new directors to resume activities.

The facts are strikingly similar to those in Kings Court Trust Limited and others v Lancashire Cleaning Services Limited, on which we reported back in June 2017 and which the court considered in this case. In Kings Court, the sole director and shareholder of a company with no secretary died. In that case too, the company owed wages to employees and sums to HMRC, and its bank accounts were at risk of being frozen. The court in that case granted an order under section 125.

Practical implications

Normally a company should register a transmission of shares on death only when a suitable grant of probate is obtained. In both Ellott and Kings Court, however, the court said it could order registration of a transmission without a grant of probate, but only in “quite exceptional circumstances”.

In more “run-of-the-mill” cases, where a company still has directors, an executor will need to obtain a formal grant of probate before any transmission of shares can be formally registered.

Even then, there must be no doubt that the transmission is valid. In Kings Court, the court said there was “every likelihood” the grant of probate would be made. In Ellott, there was no dispute over who was the executor, and all of the beneficiaries under the will had consented to the transmission. In either case, if there had been any dispute between the beneficiaries or the executors, or if the shareholder had died intestate, it seems unlikely the court would have made the order before obtaining probate.

As we noted in 2017, this highlights a risk for companies with a single director-shareholder. If that person dies, the company’s affairs may be in jeopardy until probate is granted.

A company can guard against this by ensuring it always has at least two directors, so there is no vacuum if one dies. Its constitution could also allow the personal representatives of a sole, deceased director-shareholder to appoint a director to fill the void without having to apply first to be registered as a shareholder. (The Model Articles for new private companies permit this.)

Sole director-shareholders of companies may want to review their arrangements and consider amending them to protect against this remote, but potentially burdensome, eventuality.

Takeover Panel will proceed with changes to asset valuations

The Takeover Panel has published a response statement to its October 2018 consultation on proposed changes to the Takeover Code dealing with asset valuations. We reported on this consultation in October, including the specific changes the Panel was proposing to make.

The asset valuations regime in the Code requires a party to an offer to obtain an independent valuation in certain cases where it publishes a valuation of assets. These include where a party publishes a valuation of another party’s assets, or where an offeree company or a securities exchange offeror publishes a valuation of its own assets.

The Panel has decided to adopt all of its proposed changes to the regime, with a few modifications. The response statement sets out full details of the changes. The key changes, which will take effect from 1 April 2019, are as follows:

The regime will apply to any asset valuation published during an offer period or in the 12 months before an offer period begins. It would also apply to a valuation published more than 12 months before an offer period begins if a party draws attention to the valuation in the context of the offer.
The regime will continue to affect valuations of land and buildings, plant and equipment, mineral, oil and gas reserves, and unquoted investments. The Panel will be able to apply the regime to valuations of other types of asset. A party to an offer will need to consult the Panel before including a valuation so that the Panel can make a decision.
A valuation published during an offer period will need to be in the form of, or accompanied by, a valuation report from a suitably qualified, independent valuer.
A valuation published before an offer period begins will need to be confirmed or updated by a similar valuation report. The report will need to be included in the first announcement or document published during the offer period that refers to the valuation.
The valuer must be appropriately qualified, have sufficient knowledge of each relevant market, and possess the necessary skills and understanding to prepare the valuation report.
The report must state the date as at which the assets are valued and the basis of valuation (which should normally be market value). It must give a separate valuation for each category of asset (although the Panel may permit a “representative sample” of assets in some circumstances).
If the report is not published on the valuation date, the party must obtain confirmation from the valuer that an updated valuation would not be materially different.
The valuation report must be published on a website.

Takeover Panel will proceed with changes to the Code following Brexit

The Takeover Panel has published a response statement to its November 2018 consultation on proposed changes to the Takeover Code to address the UK’s withdrawal from the European Union (“Brexit”). We reported on this consultation in November.

The Panel has decided to adopt all of its proposed changes. Most of these are administrative or technical. The only change of substance, as we previously noted, is that the “shared jurisdiction” regime will end.

Broadly speaking, this regime applies to UK companies that are traded outside the UK, and to (non-UK) EEA companies that are traded in the UK and not in their home country. In these cases, an offer for the company is governed partly by the UK Takeover Code and partly by the takeover rules in another EEA country.

Following Brexit, the shared jurisdiction regime will end. This may result in a few companies becoming subject to “dual jurisdiction”. For more information, see our November update above.

The Takeover Panel is not able yet to confirm when the changes will take effect, as this depends on the precise date on which, and the final arrangements under which, the UK leaves the EU.

Other items

Audit. The Financial Reporting Council (FRC) is consulting on making changes to International Standard on Auditing (ISA) (UK) 570 to increase the work of an entity’s auditor when assessing whether the entity is a “going concern”. The changes would require auditors to challenge management assessments more robustly. The FRC has asked for comments by 14 June 2019.
Accounting. The Institute of Chartered Accountants in England and Wales (ICAEW) has published an exposure draft setting out a revised framework for preparing prospective financial information. The ICAEW has asked for comments by 30 April 2019.