Corporate Law Update

In this week’s update: a business sale indemnity did not cover historic damage, CMA guidance on the impact of Covid-19 on merger control assessments, more detail on company general meeting reforms and a few other items.

This week:

The court finds that an indemnity against “pre-completion damage” in a business sale agreement did not cover damage that occurred before the agreement was signed
The Competition and Markets Authority publishes guidance on the impact of Covid-19 on UK merger control assessments
The Government provides more detail on proposed reforms to allow company general meetings during the Covid-19 pandemic
The Financial Reporting Council publishes guidance on modified audit opinions in the context of the pandemic
Companies House publishes guidance on company strike-offs and late filing penalties in the context of Covid-19
The Home Office is allowing organisations affected by Covid-19 to delay their modern slavery statements
ESMA updates its guidelines on alternative performance measures in the light of Covid-19
AFME publishes a report on the initial impact of Covid-19 on European capital markets

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.

Business sale indemnity did not cover historic damage

The High Court has held that an indemnity in the sale and purchase agreement for a business did not extend to damage to assets that occurred before the parties signed the agreement.

What happened?

Gwynt y Môr OFTO plc v Gwynt y Môr Offshore Wind Farm Ltd [2020] EWHC 850 (Comm) concerned the sale of the business of maintaining and operating the electrical transmission link from the Gwynt y Môr wind farm off the North Wales coast.

The sale took the form of a transfer of all of the assets making up the business. Those assets included a set of subsea export cables.

The sale agreement (SPA) contained an indemnity covering damage to the assets of the business. The indemnity was worded as follows:

If any of the Assets are destroyed or damaged prior to Completion (Pre-Completion Damage), then, following Completion, the [sellers] shall indemnify the [buyer] against the full cost of reinstatement of any Assets affected by Pre-Completion Damage.

The SPA was signed on 11 February 2015 and completed on 17 February 2015. On 2 March 2015, one of the subsea cables failed. On 25 September 2015, another cable failed. The buyer repaired the cables at a cost of £15m.

On inspection, the cause of the failure was identified as corrosion to the cables dating back months or years and caused by damage to the cables’ polyethylene sheath.

The buyer claimed the repair costs from the sellers under the indemnity on the basis that the damage to the cables had occurred before completion.

The sellers rejected the buyer’s claim, alleging that the indemnity only covered damage to assets that occurred between the date on which the SPA was signed (11 February 2015) and completion (17 February 2015), and not damage that had occurred before the parties had signed the SPA.

What did the court say?

The court agreed with the sellers.

The judge acknowledged that the indemnity did not set a “starting point” for the period during which any damage would be covered by the indemnity. It merely referred to damage “prior to Completion”, which would in theory cover the historic damage to the cables.

However, he said it was important to look at the clause as a whole and interpret it at the point the parties signed the SPA. In particular, he focussed on the tense of the verb in the indemnity.

The fact that the parties had used the verb “are” in the indemnity suggested that it was forward-looking and covered only damage that occurred after the SPA was signed. If the parties had intended to cover damage that occurred before the SPA was signed, they would have used the formulation: “If any of the Assets have been damaged or destroyed…”

In fact, he said, even then the indemnity might not have been clear enough to capture historic damage and it might have needed to refer explicitly to damage occurring “before this Agreement”.

Interestingly, the judge also noted that the indemnity appeared in the SPA immediately after the clause dealing with signing and before the clause dealing with completion. This suggested that the indemnity was intended to deal with matters arising between those two events.

Finally, he noted that the SPA already contained a warranty by the sellers confirming there had been no damage to any assets (including the cables). He said this warranty would have been “rendered pointless” if the indemnity effectively covered the same ground. He agreed that sometimes an SPA will contain warranties and indemnities that cover similar ground, but that it would be “remarkable” for the parties so carefully to structure and limit a warranty only to neuter it with an all-embracing indemnity.

What does this mean for me?

The judgment is yet another example of how indemnities are construed by the courts “contra proferentem” (i.e. against the person seeking to enforce them) and illustrates the importance of drafting an indemnity (or, indeed, any contractual provision) carefully within the commercial context of the transaction. Parties need to strike a careful balance between keeping provisions simple and understandable and not skimping on important detail.

When drafting a contractual indemnity on a business sale, it is worth considering the following:

What period of time should the indemnity cover? It is best to specify a precise start point and end point. Those could be fixed dates or instead linked to specific events. The more open-ended the “cover period”, the more likely a court is to constrain it by looking at the factual background.
What loss is the indemnity seeking to cover? Always consider including specific as well as general language (bearing in mind the eiusdem generis rule) to describe the damage/loss to be covered. Greater certainty can only be to the advantage of both the indemnifier and indemnified.
When should the indemnity kick in? It should be clear from what point the indemnity itself becomes active. This might be from the date of the contract or (more commonly on a business purchase) from the date of completion.
How does the indemnity sit alongside other contractual provisions? This is not the first case in which a court has interpreted an indemnity alongside contractual warranties (or vice versa). Courts will assume that each provision of a contract has its own purpose and that the parties do not intend to create any unnecessary “overlap”.
What is needed to claim under the indemnity? The person giving an indemnity should try to set out what specific evidence of loss needs to be shown before they are required to pay out. This might include damage assessment reports, repair bills or penalty notices.
Should the indemnity be phrased as a “covenant to pay”? Recent cases (such as AXA SA v Genworth Financial [2019] EWHC 3376 (Comm)) show that including a covenant to pay a specified or calculable amount, rather than simply an indemnity against damage, can potentially improve the measure of recovery.

CMA addresses merger control difficulties caused by Covid-19

The Competition and Markets Authority (CMA) has issued a statement addressing UK domestic merger control investigations during the ongoing Covid-19 pandemic.

It acknowledges that businesses may currently be encountering difficulties in responding to statutory information requests because of conflicting priorities or staff availability. It says that, if a business can demonstrate that it is unable to respond to a request due to difficulties caused by Covid-19, the CMA is unlikely to impose penalties.

However, it has emphasised that the statutory deadlines for merger control investigations remain unaltered and, unlike other competition authorities, the CMA is not asking merging parties to delay merger notifications. However, it is encouraging merging parties to consider whether some filings could be postponed (such as where a merger is not particularly well-advanced and may not proceed).

Importantly, the CMA has stressed that the pandemic has not brought about any relaxation of the CMA’s standards for assessing or investigating mergers.

Government sheds light on proposed shareholder meeting reforms

The UK Government and the Financial Reporting Council have published a joint Q&A document on proposed measures relating to company filings, AGMs and other general meetings. The Q&A follows the Government’s announcement on 28 March 2020 that it intends to introduce flexibility for companies when convening AGMs.

The key points arising from the Q&A are as follows:

The Government intends to enable companies to hold “closed” general meetings by telephone or electronic means with a minimum number of people.
In some cases, companies would be able to “override” their articles of association for a short period. The Q&A document does not clarify what this override will be, but presumably it will permit companies to hold telephone or electronic meetings even if their articles do not allow it.
However, the Government is not intending to legislate for virtual general meetings in a broader sense or in the longer term.
The Government expects companies to engage stakeholders “prior to, during and following” meetings. Under the UK Corporate Governance Code, listed companies are already required to do this, or explain why they have not, and so this may not add a great deal. But it may inform how and to what extent companies decide to re-schedule any investor Q&A sessions.
For a temporary period, the Government intends to allow companies to send electronic-only AGM notices, without needing to provide a hard copy on request.
Importantly, the Government does not intend to extend the deadline for holding an AGM. For public companies, the deadline under section 336 of the Companies Act 2006 remains six months from the end of the company’s financial year.

The document is clearly aimed at listed companies, but it does not state that the proposals in it are restricted to such companies and so may be useful to unlisted public and private companies that wish to hold a general meeting.

However, remember that, unlike public companies, private companies are not required to hold an AGM unless their articles of association require it, and the circumstances in which a private company is required to hold a general meeting (rather than pass a written resolution) are limited.

FRC publishes guidance on modified auditor’s reports

The Financial Reporting Council (FRC) has published new guidance on the circumstances in which an auditor may need to modify, or indeed disclaim, its opinion on a company’s accounts.

The guidance has been produced in the context of the ongoing Covid-19 pandemic, although it is based on general principles and is equally applicable outside that context. It covers the following:

The primary factors that will inform whether an auditor needs to modify its opinion.
The ways in which an auditor can modify its opinion (i.e. by qualifying it, by issuing an “adverse opinion” or by disclaiming its opinion entirely).
Additional statements an auditor may need to include in its report but which do not amount to a modification of its opinion.
In particular, the additional disclosures an auditor may need to make in relation to whether the business is a “going concern”.

Companies House publishes guidance on strike-offs and late filing penalties

Companies House has announced further changes designed to help businesses during the ongoing Covid-19 pandemic. The changes, which are outlined in its coronavirus guidance, are as follows:

Companies House will suspend voluntary strike-offs initiated by the directors of a company. This is to give creditors and other interested parties more time to object to the strike-off.
It will also suspend compulsory strike-offs that are initiated when a company fails to file its accounts or annual confirmation statement on time. This is to help businesses bring their filings up to date.

In addition, Companies House has reiterated that it has no discretion not to impose a fine for late delivery of accounts, but that it will treat any appeal against a fine“sympathetically”.

It has also confirmed that it will provide “additional support with payment plans for late filing penalties”.

These are temporary measures that apply only in response to the Covid-19 pandemic. Companies House has said it will review the changes to the voluntary strike-off process on 1 May 2020. It has not confirmed a review date for the other measures, although it seems likely it will do so when it reviews the changes to voluntary strike-offs.

Also this week…

Home Office allows delays in modern slavery reporting. The Home Office is allowing organisations that need to publish a slavery and human trafficking statement under section 54 of the Modern Slavery Act 2015 to delay their statement “by up to 6 months" if the delay is caused by Covid-19 and the reason for the delay is stated. There is no formal deadline for publishing a section 54 statement, but statutory guidance published by the Home Office states that organisations should publish their statement within six months of financial year-end. The announcement therefore most likely extends this period to 12 months.
ESMA updates APM guidelines for Covid-19. The European Securities and Markets Authority has updated its guidelines on alternative performance measures in light of the Covid-19 pandemic. In short, ESMA is asking issues to exercise caution when proposing to adjust existing APMs or include new APMs relating to Covid-19 and to consider whether it would be more appropriate to improve disclosures and include narrative information in their communications.
AFME reports on impact of Covid-19 on European markets. The Association for Financial Markets in Europe (AFME) has published a report on the initial impact of Covid-19 on Europe’s capital markets. The report notes that European markets have continued to operate well. Whilst IPOs have declined by 83% compared with a year ago, there has been a rapid increase in secondary equity offerings and corporate bond issuances.