Corporate Law Update
This week, in coronavirus-related news:
- ICSA publishes guidance to issuers on holding AGMs during the coronavirus outbreak
- The FCA publishes guidance on the impact of the outbreak on market participants
- ESMA publishes recommendations to issuers in connection with the spread of coronavirus
- Authorities issues updates on merger control notifications during the outbreak
- The ICGN publishes its viewpoint on the outbreak
- The Financial Reporting Council issues guidance to auditors on coronavirus-related issues
In other news:
- A business that engaged a new employee in breach of restrictive covenants was not liable for inducing that breach because it relied on legal advice
- Companies House launches a new digital tool for streamlined energy and carbon reporting
- The Government seeks views on how to ensure UK regulation is proportionate
- The FCA is accepting registration applications for the new National Storage Mechanism portal
- NEX Exchange is re-named as AQSE and re-issues its market rules and documentation
ICSA: The Chartered Governance Institute has published a new guidance note on the impact of the current coronavirus/COVID-19 outbreak on holding annual general meetings (AGMs).
The key points arising from the guidance are as follows:
- Companies should check their articles of association and co-ordinate with registrars and venue providers. This may involve booking a fall-back venue or possibly adjourning the meeting.
- Consider holding a hybrid meeting by adding supplemental “satellite venues” for people to participate remotely. The company’s articles might allow this, but existing case law suggests it is possible even if they don’t. (It may also be possible to “live-stream” the AGM, although, if viewers cannot participate in the meeting, they will not be regarded as attending.) The guidance warns against holding a virtual-only meeting on the basis the legal position in this area is not clear.
- Encourage proxy voting. It may also be useful to allow shareholders to vote on-line in order to pre-empt potential disruptions in the postal system.
- Conduct the shareholder Q&A or investor presentation on-line. If possible, the Q&A should be open right up until the deadline for submitting proxies so that shareholders can express their views by voting on the resolutions put to the meeting.
- Restrict the number of non-shareholder attendees. Some companies have already begun clarifying that only their UK-based directors will attend the AGM to avoid unnecessary travel. Directors who are not attending could make themselves available via video link.
- Potentially introduce enhanced safety measures, such as restricting the number of attendees and requesting temperature checks and self-certifications. A company should check its articles to ascertain to what extent it can impose these requirements.
- Dispense with lunch and refreshments. Some companies have already announced they are cancelling their shareholder lunch in a bid to reduce numbers and mitigate potential infection.
The note also contains guidance should a company need to delay convening its AGM, postpone the meeting once the AGM notice has been issued, or adjourn the meeting once it has started. This includes ensuring there are no knock-on effects on the company’s annual authority to allot or buy back shares, payment of any final dividend or approval of the directors’ remuneration policy (if required).
The Financial Conduct Authority (FCA) has published a special edition of its Primary Markets Bulletin with key commentary for market participants in the light of the coronavirus/COVID-19 outbreak.
Market participants should read the full bulletin. The key points are as follows:
- Issuers should be aware that their own operational response to the outbreak may constitute inside information under the Market Abuse Regulation and need to be disclosed to the market.
- The FCA appreciates that the outbreak may make it difficult for issuers to make decisions on disclosure and that there may be “slight delays” as new processes are put in place. But it continues to expect issuers to make every effort to make disclosures in a timely fashion.
- Persons discharging managerial responsibilities (PDMRs) and their closely associated persons are still required to notify transactions in their issuer’s financial instruments under the Market Abuse Regulation within the prescribed time frame.
- Issuers should put contingency plans in place to minimise the impact of the outbreak on corporate reporting. This might include de-prioritising non-essential parts of their annual report. The current deadlines for publishing half-year and full-year financials continue to apply.
- If an issuer does not believe it will be able to publish its financial statements on time, it should take appropriate advice, contact the FCA and engage with its auditors.
- The FCA recognises that the outbreak may mean that issuers need to hold AGMs or general meetings by virtual methods and it supports this. The FCA has not provided any guidance on whether companies can do this. For more information, companies can refer to the new ICSA guidance note (see above).
Separately, the FCA has published a new webpage containing information for firms on how to respond to the outbreak and steps it is taking in response.
The European Securities and Markets Authority (ESMA) has published recommendations to financial market participants on dealing with the impact of the coronavirus/COVID-19 outbreak.
In particular, ESMA is recommending the following:
- Business continuity. All financial market participants should be ready to apply contingency plans, including by deploying business continuity measures.
- Market disclosure. Issuers should disclose as soon as possible any relevant significant information concerning the impacts of the outbreak on their fundamentals, prospects or financial situation.
- Financial reporting. Issuers should provide transparency on the actual and potential impacts of the outbreak, based (where possible) on a “qualitative and quantitative assessment” of their business activities, financial situation and economic performance, in their 2019 year-end reports.
ESMA has said it will continue to monitor developments in financial markets and is prepared to use its powers to ensure that they continue to function in an orderly manner.
The Court of Appeal has held that a company which hired a new employee while he was subject to restrictive covenants was not liable because it had relied on legal advice.
Allen v Dodd & Co Ltd  EWCA Civ 258 concerned an individual who resigned from his employer and, three days later, joined a competitor.
The individual’s employment contract contained restrictive covenants requiring him not to take up employment with a competitor or to deal with his former employer’s customers for 12 months.
Under English law, a covenant restricting a person’s employment or trade cannot be enforced if it goes further than necessary to protect the legitimate business interests of the person it is designed to protect (in this case, the individual’s former employer).
The individual took advice on this point before joining his new employer. His lawyers advised him that, because the covenants would be in force for 12 months, they lasted too long and were therefore unenforceable. The individual sent a copy of this advice to his new employer.
Separately, before hiring him, the new employer took legal advice to ensure it would not be liable for inducing the individual to breach the covenants. Under English law, a person is liable for inducing a breach of contract if they persuade someone to act in a way which they know will result in a breach.
The new employer’s lawyers said that the matter was not entirely without risk. But they advised that the covenants were more likely than not to be unenforceable because they lasted too long.
Unsurprisingly, the old employer brought a claim against the individual for breaching the covenants and against the new employer for inducing that breach. The High Court found that the restrictive covenants were in fact enforceable and that the individual had breached them.
But it said the new employer had not induced a breach, because it acted honestly in relying on the legal advice it had obtained. That was so, even though that legal advice turned to be incorrect.
The old employer appealed the second point. It argued that the new employer’s legal advice was not “firm advice” and that the new employer was aware there was a risk the covenants would in fact be enforceable. It therefore knew it could be inducing a breach of contract.
What did the court say?
The Court of Appeal dismissed the appeal. It said that it was not enough for the new employer merely to suspect that employing the individual might breach the restrictive covenants. To be liable, the new employer had to know it would result in a breach of contract.
In this case, it did not matter that the legal advice was equivocal, nor that it turned out not to be correct. The court recognised that people do not hold “absolute beliefs” about legal rights and wrongs and “should be able to act on legal advice, responsibly sought, even if [it] turns out to be wrong”. It said that “lawyers rarely give unequivocal advice” and “there is always a risk … advice will turn out to be wrong”.
What does this mean for me?
The decision is obviously of assistance to businesses who are looking to bring in new people.
Importantly, this goes beyond merely employment contracts. It is common to find restrictive covenants in a non-employment context. For example, an investor may seek covenants from existing managers or founders to support the value of its equity injection. Likewise, a buyer of a business may seek covenants from the seller to protect its new investment. These covenants usually cover not only becoming employed by a competitor, but becoming in any way interested in or investing in one.
This judgment does not absolve businesses of the need to check whether new staff or investors are subject to restrictive covenants. But it does give comfort that, as long as a business obtains reputable legal advice and honestly relies on that advice in relation to those covenants, it should not incur liability. That will be the case even if the advice is equivocal or states that there is some residual risk.
However, there are some limits. Obviously, if the advice states that employing someone will result in breach of covenant, the new employer will not escape liability.
Likewise, advice that it is (in the court’s words) “arguable” there will be no breach is not going to be enough to avoid liability. Here, the court suggested the test is whether the advice states that it is “more probable than not” there will be no breach. But the case law on inducing a breach of contract is not crystal clear, and many businesses will want firmer advice before bringing someone on board.
Any business looking to bring in a new employee, director or officer can take a few simple steps:
- Ask the joiner whether they are subject to any restrictive covenants of any kind. Check their current employment or service contract to understand the extent of those covenants.
- Seek legal advice on the covenants. Make sure the lawyers dispensing that advice are familiar with the nature and context of covenants so that their advice will carry weight with the courts.
- Digest the legal advice carefully. Merely getting legal advice will not serve as a shield to a claim for inducing a breach of contract. If the advice suggests there is a material risk that restrictive covenants will be breached, or if the advice is manifestly wrong, it is unlikely to be reasonable to rely on it.
- Document any decision to engage the new joiner. If the business does decide it can rely on its advice, set this out in board minutes or a separate memorandum. This may prove useful later should there be a claim.
- Competition authorities issue updates during coronavirus outbreak. The European Commission has encouraged companies that are currently contemplating making an EU merger control notification to delay doing so until further notice, where possible. This is, in part, because the Commission is likely to face difficulties in collecting information from relevant persons. For domestic merger control notifications (which are voluntary under the UK’s regime), the Competition and Markets Authority (CMA) has confirmed that its statutory deadlines continue to apply, but that it will extend statutory timeframes where necessary and permitted.
- ICGN publishes coronavirus considerations. The International Corporate Governance Network (ICGN) has published a viewpoint exploring corporate governance and investor perspectives relating to the on-going coronavirus and COVID-19 outbreak. The viewpoint considers the role of institutional investors and stewardship in the outbreak, explores corporate governance issues (such as board effectiveness and leadership) and concludes with questions that investors may wish to consider when engaging with companies and their boards.
- FRC issues guidance to auditors on coronavirus. The Financial Reporting Council (FRC) has published new guidance to auditors on audit issues arising out of the current coronavirus and COVID-19 outbreak. (The guidance follows on from the FRC’s recent guidance to companies on disclosing risks arising from the outbreak.) The guidance contains a list of factors that auditors will need to take into account when conducting audits. The FRC’s view is that, in the current circumstances, additional time may be needed to conduct audits and it is important to take this time, even at the risk of delaying company reporting.
- Companies House launches digital tool for SECR reporting. Companies House has launched a new digital tool to make it easier for businesses to report energy and carbon data under the Streamlined Energy and Carbon Reporting regime that came into force on 1 April 2019. The taxonomy, which was developed alongside the Financial Reporting Council (FRC) and the Department for Business, Energy and Industrial Strategy (BEIS), allows businesses to report information in XBRL format (which many entities already use for their annual accounts).
- Government seeks views on regulatory reform. The Department for Business, Energy and Industrial Strategy (BEIS) has launched a consultation seeking views on how the Government can ensure that UK regulation remains “sensible and proportionate”. The consultation takes the form of an on-line survey allowing respondents to provide suggestions in their own words.
- FCA opens NSM electronic submission system. The Financial Conduct Authority (FCA) has confirmed that the electronic submission system (ESS) for the new National Storage Mechanism (NSM) portal is now open. Individuals who are likely to be uploading documents to the NSM can now apply for an account with the ESS. For more information, see our previous Corporate Law Update. It is not yet possible to upload regulatory information to the NSM.
- AQSE launches revised admission standards. Following its acquisition by Aquis Exchange plc, NEX Exchange has been re-named the Acquis Stock Exchange (AQSE). As a result, AQSE has issued new versions of its documentation, including its Main Market Admission and Disclosure Standards and its Growth Market Rules for Issuers, to reflect the name change.