Corporate Law Update
- The European Commission updates its temporary framework relaxing State aid restrictions during the Covid-19 pandemic
- The UK Government expands its financing support for large businesses but imposes restrictions for larger borrowings
- The Government’s proposed legislation to allow virtual general meetings has been published
- A bidder on a public takeover was not permitted to invoke material adverse change conditions to withdraw its offer in light of the Covid-19 pandemic
- The PLSA established an industry group to assist pension schemes with ESG and stewardship disclosures
- The FRC updates its Covid-19 guidance to cover alternative performance measures (APMs)
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.
The European Commission has updated and amended its Temporary State Aid Framework (first adopted on 19 March) that applies during the Covid-19 pandemic.
The Framework provides a temporary relaxation from the EU State aid regime, which (broadly speaking) seeks to preserve competition within the EU by preventing EU Member States from providing direct funding to individual businesses. Under the Framework, EU Member States (including, for these purposes, the UK) can inject equity and hold subordinated debt in entities that have been hit by the pandemic, provided certain conditions are met.
You can read more about the Framework in this article by our colleagues Cameron Firth, Christophe Humphe and Fiona Beattie. In short, some of the key points to note for equity investments are as follows:
- States cannot provide funding to “financial” undertakings (such as banks) or “undertakings in difficulty”. The latter restriction is particularly relevant, although the assessment is backdated to December 2019 to take account of the fact that many otherwise viable businesses that will be seeking funding during the Covid-19 pandemic may well be in financial difficulty.
- The State’s involvement must be adequately remunerated and time-limited and, until that equity has been redeemed, beneficiaries of aid cannot pay dividends or buy back shares (except in relation to shares held by the State).
- While at least 75% of the equity has not been redeemed, each manager’s remuneration cannot exceed their fixed remuneration as at 31 December 2019. (Different measures apply for people who become managers on or after the recapitalisation.)
- Also while at least 75% of the equity has not been redeemed, the beneficiary cannot acquire more than 10% of the equity in any competing business or any business operating in an upstream or downstream related market (with some limited exceptions).
- The aid received from the State cannot be used to cross-subsidise economic activities of integrated companies that were in financial difficulty on 31 December 2019.
On a separate but related note, the UK Government has announced that it is extending its Coronavirus Large Business Interruption Loan Scheme (CLBILS), with the maximum amount that businesses can borrow under the scheme being increased from £50m to £200m.
The increase, which will be available from 26 May, is designed to plug the gap between CLBILS and the Bank of England’s Covid Corporate Financing Facility (CCCF), for which some businesses may not qualify.
For more information on CLBILS, see our in-depth note.
Importantly, any company wishing to borrow more than £50m under CLBILS will be subject to certain strict restrictions, similar to those under the Temporary State Aid Framework described above:
- The company must not pay any dividends, other than any it has already declared.
- It must not agree to buy any shares back from shareholders.
- It must not pay any cash bonus, or award any pay rise, to senior management (including its directors), unless that bonus or pay rise was declared before the CLBILS loan was taken out, is in keeping with similar payments during the preceding 12 months, and does not have a material negative impact on the borrower's ability to repay the loan.
The Government’s proposed legislation to address the difficulties for companies and other corporations in holding general meetings (particularly annual general meetings (AGMs)) and making regulatory filings has been published.
The Corporate Insolvency and Governance Bill would bring in numerous changes on a temporary basis during the Covid-19 pandemic. The key points from a company law perspective are as follows. (Insolvency law changes are beyond the scope of this update.)
The Bill would allow certain corporations that wish or need to hold a meeting of their members to do so virtually. The new provisions will apply to both general meetings (including AGMs) and to “class meetings” (i.e. meetings of a certain subset of the corporation’s members).
The provisions apply to meetings of various types of corporation, including companies formed and registered under the Companies Acts, building societies, friendly societies, charitable incorporation organisations (CIOs), co-operative societies and community benefit societies.
In short, the Bill would make the following changes.
- The meeting would not need to be held in any particular place. There would be no requirement for any particular number of people to be in the same place.
- The meeting could be held, and votes be taken, by electronic or any other means.
- Members of the corporation (e.g. shareholders) would have no right to attend the meeting in person. They would be entitled to vote, but not by any particular means (e.g. a show of hands).
- The Government would have the power to modify how a notice of meeting is made available, as well as the form of notice and the deadline for sending it.
These provisions would override anything to the contrary in any specific legislation or in the corporation’s constitution or rules. They would apply to any meeting held on or after 26 March 2020 and on or before 30 September 2020. The Government would have the ability, by regulations, to extend this period by blocks of three months up to 5 April 2021.
Extension for AGMs
Alongside this, the Bill would extend the deadline for a corporation to hold its AGM if it would otherwise have had to do so between 26 March 2020 and 30 September 2020 (inclusive). Instead, the corporation would be able to hold its AGM any time on or before 30 September 2020.
In addition, the Government would have the power, by regulations, effectively to extend the period within which a particular kind of corporation must hold an AGM by eight months, provided some portion of that period would have fallen between 26 March 2020 and 30 September 2020.
These provisions would apply to the kinds of corporation described above and, again, would override anything to the contrary in legislation or in the corporation’s constitution.
For public companies, the provisions also apply to the company’s “accounts meeting” (i.e. the general meeting at which the company is required to lay its statutory accounts before its members). This is invariably the company’s AGM, although the two meetings can (in theory) be held separately.
In deciding whether to postpone its AGM, however, a public company will need to consider when any authorities and approvals obtained at its last AGM (such as to allot and buy back shares, disapply pre-emption rights and make political expenditure or donations) will expire in the meantime.
The Bill would also extend the deadline for companies to file certain information at Companies House.
If a public company is required to file its accounts at Companies House after 25 March 2020, it would instead have until 30 September 2020 (or, if earlier, 12 months after its financial year-end) to do so.
The Bill would also give the Government the power to extend the filing deadline for a range of routine filings by companies, limited partnerships (LPs), limited liability partnerships (LLPs) and European companies (SEs). These include (for example) changes to the registered office address, directors or (for LLPs) members, and persons with significant control, as well as the periods for filing statutory accounts and the annual confirmation statement.
If the filing period is shorter than 21 days, the Government would be able to extend it by up to 42 days. If it is between three and nine months, it could be extended by up to 12 months.
This power would expire on 5 April 2021.
Finally, and interestingly, the Bill contains a power to allow the Government to “change or disapply any duty of a person with corporate responsibility or the liability of such a person to any sanction”. The Bill clarifies that “person with corporate responsibility” includes a director or secretary of a company and a member of an LLP.
This power is nestled between the Bill’s insolvency provisions and corporate governance provisions, so it is not clear quite what it is contemplating. However, read at face value, it would give the Government the power to grant blanket reliefs to directors for breaching their statutory duties to a company.
This power would expire on 30 April 2021.
The Government would be able to exercise this power only in order to “take due account of the effects of coronavirus on businesses of the economy of the UK”, and it could not do so unless it first considered the interests of debtors, creditors and employees. Nonetheless, this wording seems sufficiently broad to cover any number of situations.
The Takeover Panel (the “Panel”) has published a statement (Statement 2020/4) confirming that Brigadier Acquisition Company Limited (“Brigadier”) is not able to invoke certain conditions, including material adverse change (MAC) conditions, to its offer to acquire Moss Bros Group plc (“Moss Bros”).
The takeover has been structured as a statutory scheme of arrangement under Part 26 of the Companies Act 2006. As a result, the terms of the offer are set out in a scheme document sent by Moss Bros to its shareholders. The document includes a recommendation by the Moss Bros board to vote in favour of the scheme so that shareholders can receive the cash price from Brigadier.
In that scheme document, Moss Bros set out various conditions precedent to the takeover which were included to protect Brigadier. This included conditions broadly along the following lines (but simplified for the purpose of this update):
- that there is no material adverse effect on the business, assets, liabilities, profits, financial or trading position or prospects of any Moss Bros group company caused by any central bank, authority, association or employee body bringing any action or any new or existing law, regulation or published practice;
- that no Moss Bros group company is unable to pay its debts, has stopped paying its debts, or has commenced negotiations with any of its creditors to reschedule or restructure its debt;
- that (after 27 July 2019) nothing happens which might reasonably be expected to result in a material adverse change in the business, assets, financial or trading position or profits, operational performance or prospects of any Moss Bros group company; and
- that (after 27 July 2019) no contingent or other liability arises or increases (other than in the ordinary course of business) that is reasonably likely to materially adversely affect the business, assets, financial or trading position or prospects of any Moss Bros group company.
On 22 April 2020, Brigadier lodged a formal submission with the Panel Executive explaining why, in the light of the on-going Covid-19 pandemic, it should be permitted to invoke each of these conditions. Moss Bros opposed this submission and, at the ensuing shareholder meeting on 29 April 2020, the scheme was approved by the required shareholder majorities.
Under the UK’s Takeover Code, a bidder (or “offeror”) cannot invoke a condition to an offer (other than certain anti-trust conditions) unless the circumstances allowing it to invoke the condition are “of material significance to the offeror in the context of the offer”.
The Panel established (in its ruling on WPP Group plc’s 2001 offer for Tempus Group plc) that meeting this test requires an “adverse change of very considerable significance striking at the heart of the purpose of the transaction in question”. The bar a bidder has to clear is therefore very high.
What did the Panel say?
The Panel Executive has now decided that Brigadier has not established that the circumstances in question are of material significance to it in the context of its offer for Moss Bros, and that it therefore cannot invoke the conditions. The Panel has not yet published the parties’ submissions or its reasoning.
Since Statement 2020/4 was published, the Panel has published a second statement (Statement 2020/5) confirming that Brigadier has decided to request a review of the Executive’s ruling. We will be watching this development closely.
What does this mean for me?
The ruling is interesting and significant in the context of the on-going pandemic and shows the sheer difficulty which a bidder faces in trying to withdraw from a firm takeover offer in the UK. Covid-19 is clearly one of the most disruptive and damaging events to occur in the UK, and worldwide, in decades. Yet the Executive was not prepared to allow Brigadier to withdraw its offer on the basis of a MAC.
This does not mean that a bidder cannot invoke a MAC condition. The Panel’s Practice Statement No 5 clearly states that the Executive will take into account all relevant factors when deciding whether the threshold for invoking a condition (including a MAC condition) is met. Importantly, this includes the particular circumstances of the target company and whether a bespoke condition was drafted.
As we say above, the Panel has not yet announced the reasoning for its ruling. However, we can to some degree speculate based on the surrounding circumstances:
- Brigadier announced its firm offer on 12 March 2020 when the Covid-19 pandemic had already taken hold. The Panel Executive may have felt that the potential impact on Moss Bros was foreseeable, or that the long-term commercial justification for the offer will not be put at risk if the lock-down is only temporary; and
- the scheme document did not include a bespoke Covid-19 condition which was brought to the attention of Moss Bros’ shareholders (so they would be aware the offer might lapse) (but, rather, an entirely “standard” condition). Had it done so, the result might (although not necessarily would) have been different.
If a bidder wants to maximise its chances of being able to lapse an offer due to a condition not being satisfied, it will need to draft the conditions carefully and consult the Panel Executive and its advisers before taking any action.
In most cases, withdrawal is simply not possible, especially if the bidder is looking to rely on a standard condition (such as a MAC) which has not been drafted with particular circumstances in mind. Even then, the Executive will look at the facts and circumstances at the time to decide whether the overriding material significance test has been met.
Also this week…
- PLSA sets up working group for ESG disclosures. The Pensions and Lifetime Savings Association (PLSA) has established an industry group to support pension schemes with their new duty to disclose how they have considered ESG, stewardship and engagement in their investment approaches. In October 2020, trustees of defined contribution (DC) schemes must publish an “implementation statement” explaining how they have implemented their publicised investment approach, and trustees of defined benefit (DB) schemes must publish details of their investment approach for the first time. The industry group aims to produce guidance to assist trustees with these requirements.
- FRC updates guidance on interim reports and APMs. The Financial Reporting Council (FRC) has updated its guidance to companies on publishing interim financial reports and alternative financial measures (APMs). In particular, the guidance notes that, whilst APMs should be presented consistently year on year, there may be circumstances where the Covid-19 pandemic has resulted in a company making changes to its business model, which may in turn result in changes to previously published APMs. If this happens, the company should explain why the revised APMs provide more reliable and relevant information. The guidance also advises against using “normalised” or “pro forma” APMs, as they are likely to be highly subjective and unrealiable.