Corporate Law Update

• The court finds it was unreasonable for a contract party to make its consent to an amendment conditional on an increase in the contract price
• New regulations have been published that will require details of the beneficial owners of express trusts to be made public
• The Financial Reporting Council is seeking participants for a new project on corporate risk reporting
• New regulations have been published requiring businesses to collect contact details from persons entering their premises

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

Withholding consent to re-visit contract price was unreasonable

The High Court has held that it was unreasonable for a contract party to require an adjustment to the contract price as a condition to giving consent to an amendment to the contract.

What happened?

Apache North Sea Ltd v INEOS FPS Ltd [2020] EWHC 2081 (Comm) concerned a contract for the transport of off-shore hydrocarbons through a pipeline network to on-shore Great Britain.

The original transport contract was between the current shipper and the pipeline owner’s predecessor, which was, in due course, novated to the current pipeline owner.

The contract contained an attachment setting out the shipper’s anticipated transport requirements up to the end of 2020. Under the contract terms, the shipper committed to that capacity and would pay a specified sum per barrel transported, whether or not it supplied the hydrocarbons for transportation.

The contract allowed the shipper to increase or alter its commitment by amending the attachment. Subject to there being sufficient capacity to accommodate the shipper’s request, the contract prohibited the pipeline owner from unreasonably withholding consent to the amendment.

The shipper submitted a request to amend the attachment to confirm its capacity requirements from 2021 up to 2040. The pipeline owner stated that it was prepared to provide consent if the contract tariff per barrel were increased to double the original amount.

The shipper argued that it was not reasonable for the pipeline owner to withhold its consent to the amendment if the shipper did not agree to the increased tariff.

What did the court say?

The judge found that the pipeline owner was not entitled to demand an increase in tariff as a condition to giving consent to the amendment.

The reasons for the court’s decision hinge on the very specific wording of the contract. However, one of the key reasons underpinning the decision was that, except in very limited circumstances, for so long as the contract was in force, the shipper was required to use the pipeline, at the agreed tariff, to transport any hydrocarbons to mainland Great Britain.

That requirement lasted for the duration of the contract, which envisaged transportation beyond the end of 2020. That is, the contract contemplated a situation where the shipper would need to revise the attachment to deal with production after 2021.

The judge felt it would be inconsistent with the terms of the contract for the pipeline owner to make its consent to what was already contemplated by the contract subject to a “fundamental revision” in the form of a new tariff.

In reaching his decision, the judge noted that, normally, it will not be reasonable for a contract party to refuse consent merely to enhance its rights under the contract. However, the fact that the person whose consent is required might gain an entitlement by imposing a condition will not of itself make that condition unreasonable or illegitimate.

Importantly, the judge endorsed the view that, in deciding whether to impose a condition on giving consent (or to refuse consent), a person must have regard to the subject matter of the contract that forms the relationship between the contract parties. The reason for imposing a condition cannot be something “wholly extraneous and completely dissociated” from the contract.

What does this mean for me?

The need to seek consent from another party to a contract comes up frequently in the context of corporate transactions.

For example, a person who has agreed to sell a business may need to seek consent from the buyer under the sale agreement before undertaking certain actions, such as incurring significant expenditure or making changes to the capital structure of the business.

Likewise, parties to a joint venture may need consent from each other in certain circumstances, and it is standard where institutional investors have contributed equity to a company for certain “veto matters” to require the investor’s consent.

A contract party which is considering giving consent or attaching conditions to a consent should bear certain matters in mind.

• Be wary of using the consent mechanism to turn the contract to your advantage. While a contract party can impose conditions or refuse consent to protect their existing contractual rights, it is not reasonable to do so to engineer a better position by enhancing or creating new rights.
• Take the decision based on how it affects your contractual relationship. Generally, contract parties have wide latitude to take their own commercial interests into account, but it will not be legitimate to base a decision on reasons wholly unconnected with the contract.
• Pay attention to the context and purpose of the contract. Consent provisions – just like other contractual terms – will be interpreted within the context of the contract as a whole. Although the decision whether or not to give consent, or to subject consent to conditions, should be taken on the circumstances at the time, the purpose and limits of the consent provision need to be understood alongside the other terms of the contract.
• Finally, and related to these points, remember that, in many cases, the so-called “Braganza duty” may apply to the decision. If the decision is irrational or one which no reasonable person could reach, or is based on factors that are totally irrelevant, the courts may insist on the decision being reconsidered. In some cases, where the decision was “binary”, the courts have even effectively overridden it, effectively making the decision for the parties.
• Is a consent mechanism appropriate at all? A party will have freer rein to provoke price renegotiations if it is not required to provide consent.

New regulations published requiring trusts to provide beneficial ownership information

New regulations have been published to expand the UK’s Trust Registration Service (TRS), which requires certain types of “taxable trust” to provide details of their beneficial owners to HM Revenue & Customs (HMRC). We previously reported that HMRC was consulting on this expansion.

The Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 amend the existing Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

In short, the new regulations expand the TRS in two ways:

• To date, the TRS has applied only to “relevant taxable trusts”. This means a trust whose trustees are, in a given year, required to pay one of various UK taxes in relation to the trust’s assets or income. Going forward, the scheme will apply to all express trusts created in the UK, as well as non-UK trusts which have sufficient connection with the UK.
  
  Trustees of trusts that fall within the extended TRS will need to provide details of the beneficial owners to HMRC by 10 March 2022 (if the trust existed before 9 February 2022) or within 30 days of the trust falling within the extended TRS (if the trust was created after that date).
• Currently, information held by HMRC under the TRS is private and can be provided only to law enforcement agencies. From 10 March 2022, any member of the public will be able to access information on the TRS register if they can show they have a “legitimate interest”. This is an intentionally high bar and applicants will need to provide quite detailed information about their suspicions that a trust is being used for money laundering or terrorist financing before beneficial ownership information will be released.
  
  The regulations do not state what a “legitimate interest” is, although they do set out certain matters HMRC must take into account when deciding this. They also give HMRC the discretion to refuse to supply information if (among other things) the beneficial owner is under 18 years of age or to do so would expose the beneficial owner to a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation. More detailed guidance is expected in late 2020 or early 2021.

For more information on how the expanded TRS will work, see this update by our colleagues.

Trusts commonly arise in the context of transactions involving the sale or merger of a business, private equity investments and generally holding shares in companies. Helpfully, the new regulations include a series of exclusions that mean that most trusts created in these circumstances will be exempt from the regime. These include the following.

• Trusts relating to uncertificated shares held through the CREST system. This means that arrangements under which a custodian or nominee holds shares for an underlying owner (which is a common way of holding shares in publicly traded companies) do not need to be reported.
• Trusts where the trustee is acting as an escrow agent until some obligation or condition in a contract is fulfilled. Retention and escrow arrangements are frequently put in place on the sale of shares, a business or some substantial asset. This exemption helpfully means that these arrangements will not need to be reported.
• Trusts created in connection with financing, such as commercial loan and credit facilities and any associated security.
• Trusts created on the transfer or disposal of an asset pending the transfer of legal title to the buyer. In a corporate context, this avoids the need to report a trust that is created and exists on (for example) the sale of the shares in a company while the parties arrange for stamp duty to be paid and the target company’s shareholder register to be updated.
• Trusts created to enable or facilitate a transaction for genuine commercial reasons where using the trust is incidental to the principal purpose of the transaction. This is a rather wide “catch-all” which should avoid the need to report trusts that are created for structural purposes. Although the regulations don’t expand on this, the accompanying explanatory memorandum suggests that this is designed to cover trusts used in contracts to “ensure they function properly”.
• Registered pension scheme trusts.
• Trusts of insurance policies.
• Share incentive plan and share option scheme trusts.

Although these exclusions ensure that most trusts used in corporate transactions will fall outside the expanded TRS, businesses should always remain vigilant. It is important to ensure either that any express trust falls within one of these exceptions or that the relevant information is sent to HMRC.

Also this week…

• FRC seeks participants for new risk reporting project. The Financial Reporting Council’s Financial Reporting Lab is seeking participants for a new project on “corporate disclosures on risks, uncertainties and scenarios”. The Lab expects to address how companies consider and report on their business model and strategy, how risk, uncertainties and scenarios, viability and resilience are reported, and the drivers of value. Investors and companies wishing to participate should contact the Lab using the details provided. 
• New track and trace regulations published. New regulations have been published to help track and trace people who are, or come into contact with someone who has been, diagnosed with Covid-19. From 18 September, businesses must collect contact details from anyone who enters their premises and deny entry to anyone who refuses to supply those details. From 24 September, businesses must also display a QR code at their premises for people entering to scan.