Corporate Law Update

In this week's update: Revised directors' remuneration reporting guidance from the GC100, AFME publishes new selling restriction wording, a termination right was lost when it was not incorporated into a contract by a variation and a few other items.

The GC100 and Investor Group have published a revised version of their directors’ remuneration reporting guidance to reflect changes made to implement SRD II
The Association for Financial Markets in Europe has published revised selling restriction wording for issuers of securities to cater for the EU Prospectus Regulation
The Court of Appeal has held that a party lost the ability to terminate a pilot scheme by notice when it incorporated the scheme into a permanent framework contract
A few other items of interest

GC100 publishes revised remuneration reporting guidance

The GC100 and Investor Group have published a revised version of their directors’ remuneration reporting guidance. The updated guidance reflects the changes that have recently been made to the regime for reporting on quoted company director remuneration in order to implement the Second EU Shareholder Rights Directive (SRD II).

In particular, the updated guidance reflects the following changes:

Going forwards, for certain purposes, anyone fulfilling the role of chief executive officer (CEO) or deputy CEO is to be treated as a director even if they have not been appointed as such.

This might include (for example) the most senior member of the company’s executive committee. However, it does not apply to someone who discharges a senior management function (such as a chief risk officer or chief operating officer) but who has not been appointed as a director (even if their job title includes the word director).
A company’s “single total figure table” will need to include separate totals for fixed pay and variable pay.
The percentage change of each director’s salary or fees, benefits and short-term incentives must be compared against the average of full-time employees. The percentages must show historic information for the past five years. Previously this requirement applied only to a company’s CEO, but now it extends to all directors (executive and non-executive).

Strictly speaking, companies must now compare changes in pay against employees of the parent company, rather than employees across the group as a whole. However, the revised guidance suggests that, if a parent company employs only a small proportion of the workforce, it may choose to disclose changes on a group-wide basis as well.
In future remuneration policies, a company must explain the “decision-making process” for determining, reviewing and implementing the policy. In addition, the company will need to explain, in the remuneration report, any deviations from its stated implementation procedure. Historically, companies have not had to state an implementation procedure in their remuneration policy (and generally have not done so). Where the policy does not set out an implementation procedure, it will not be possible to explain any deviations from it in the report.
Companies must include an indication of the duration of directors’ service contracts or arrangements. Companies should either state the fixed term of a director’s contract or state that (as is more common in the UK) no fixed term exists.

AFME updates selling restriction wording for Prospectus Regulation

The Association for Financial Markets in Europe (AFME) has published revised wording for the selling restrictions most commonly put in place on equity transactions. The new wording refers to the EU Prospectus Regulation, the bulk of which came into force in the UK on 21 July 2019.

The wording has also been separated out into restrictions for transaction contracts (such as underwriting agreements) and for prospectuses.

The purpose of selling restrictions is to give comfort to an issuer that any shares placed by or with its underwriters will not be offered in breach of EU prospectus rules.

AFME last updated its selling restriction wording in April this year to reflect the possible scenarios for the UK’s withdrawal from the European Union. The new wording published this month does not include alternative wording to cater for different Brexit scenarios, but AFME has said it will update the wording again closer to 31 October 2019 (the scheduled date for the UK’s withdrawal) if necessary.

Termination right was lost when contract was amended

The Court of Appeal has held that, when a contract was amended to incorporate an ancillary service that the parties had been running on a trial basis, the ability to terminate that ancillary service was lost.

What happened?

NHS Commissioning Board v Vasant and others concerned the former Croydon Primary Care Trust (PCT). (Croydon PCT was responsible for primary, community and secondary health services in Croydon, England. It was abolished in March 2013, along with all other PCTs, and its contracts transferred to NHS England.)

In 2006, the PCT entered into a General Dental Services (GDS) Contract with three dentists, under which the dentists would provide general dental services to the PCT. Among other things:

The GDS contract contained an “entire agreement clause”, which stated that the contract embodied the entire arrangement for GDS and superseded any other arrangements.
The parties could amend the GDS contract only by signing a written “variation agreement form” (or VAF) setting out the changes.
The PCT could not terminate the GDS contract unless the dentists were in default. In particular, it had no right to terminate it simply by sending notice.

In 2007, the PCT established a pilot scheme to provide intermediate minor oral surgery (IMOS) (such as tooth and root extractions). The three dentists participated in the scheme.

The IMOS scheme was set out in a separate contract. The IMOS contract had a fixed term of 12 months, ending in November 2008, which the parties could extend by agreement. However, the PCT could terminate the IMOS contract at any time on one month’s notice.

In the end, the PCT and the dentists continued the IMOS pilot beyond November 2008. In effect, they renewed and continued the IMOS contract by their conduct.

The PCT and the dentists wished to formalise the extension of the IMOS scheme. In April 2009, they signed a VAF to incorporate the IMOS scheme into the GDS contract. In the words of one of the PCT’s representatives, this was a “far more sensible approach” than re-signing the IMOS contract.

In 2016, NHS England (which had taken over from the PCT) attempted to terminate the IMOS scheme.

The dentists said this was not possible because, although the IMOS contract had allowed the PCT to end the contract on a month’s notice, the scheme had now been incorporated into the GDS contract, and that contract did not allow termination simply by notice unless the dentists were in default.

What did the court say?

The court agreed with the dentists. It said that the parties had plainly amended the GDS contract so as to incorporate the IMOS scheme under the framework of that contract.

NHS England had argued that, by bringing the IMOS scheme within the GDS framework, the parties must have intended to bring across the PCT’s right to terminate simply by sending notice.

But, in the court’s view, when the IMOS scheme was incorporated into the GDS contract, it became a “further service” that was subject to the terms of that contract. The GDS contract did not allow NHS England to terminate by notice. The parties could have referred to the PCT’s existing termination right in the VAF if they had wanted to incorporate it into the GDS contract, but they did not.

Moreover, the entire agreement clause in the GDS contract rendered the previous contractual arrangements for the IMOS scheme redundant, including the termination rights in the IMOS contract.

What does this mean for me?

This case shows how important it is when amending a contract, or when consolidating different contractual arrangements, to comb through the different frameworks and mechanisms in those contracts and ensure that the parties have captured everything they intend to.

In this case, the court suggested that, if the parties had at least referred in the signed VAF to the termination right in the IMOS contract, that right might have been incorporated into the GDS contract.

Questions to consider when amending or consolidating contracts include:

Should different services or arrangements be provided under different models? If so, is it simpler to deal with the services in separate contracts?
If bringing a discrete service within the scope of a broader framework or master agreement, is the master model suitable for that service? Should any bespoke provisions be applied to that service?
Do any of the contracts contain a specific procedure for making amendments (a so-called “change control procedure”)? If so, has that procedure been followed?

Other items

Prospectuses. The Financial Conduct Authority (FCA) has updated its forms and checklists and its Knowledge Base to reflect the fact that the EU Prospectus Regulation came fully into force in the UK on 21 July 2019. In particular, the FCA has created a new “Form A” for submitting a prospectus for approval under the new regime, and a new Publication Form for when a prospectus is formally published under the new regime.
Proxy advisers. The Best Practice Principles for Shareholder Voting Research and Analysis Group has published an updated version of its principles for voting research and analysis providers. The revised principles reflect changes made by the Second EU Shareholder Rights Directive (SRD II) and recent changes in corporate stewardship.

Authors

Dominic Sedghi Head of Knowledge