Corporate Law Update

In this week’s update: Further Law Society guidance on e-signing during Covid-19, new powers of intervention on takeovers with public health implications, deeds of guarantee were delivered when their signature pages were emailed to the other side and a few other items.

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.

Law Society publishes further guidance on virtual and electronic signings

The Law Society has updated its advice note on conducting virtual signings (also known as “Mercury signings”) and purely electronic signings during the Covid-19 pandemic.

The note was originally published in May this year to assist legal professionals working on transactions. Although primarily aimed at lawyers, the note will undoubtedly be useful for others who deal with contract execution from time to time, including conveyancers, legal executives, contract managers, HR personnel, project managers and others.

For information on the original advice note, see our previous Corporate Law Update.

The updated advice note contains some tips on how to operate in practice, which are designed to supplement the Society’s guidance on the law in this area. The tips include the following:

  • Speak to the lawyers on the other side of any transaction to ensure that there is clear agreement on how to manage the transaction.
  • Consider what steps (if any) to take to verify the identity and authority of each person who will be signing. This might include confirmation from a solicitor, or video or photographic evidence (such as a live recording of the signing that is then shared with other parties).
  • Keep that evidence to hand on file.
  • Use electronic means to report back to all parties that the transaction has closed.
  • As the law currently stands, a witness must be physically present when a signatory signs a deed. Although made more difficult by social distancing, physical presence remains possible with appropriate safeguards. When operating on the extremities of what might reasonably constitute presence, collect clear evidence of presence, such as a video-recording.

Power to intervene in mergers extended to public health emergencies (and other potential changes)

Following the Government’s announcement on 22 June 2020, new legislation came into effect on 23 June 2020 expanding the public interest merger regime and giving the Government power to intervene in takeovers that might threaten the UK’s ability to combat a public health emergency (such as Covid-19).

The Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020 amends the powers of the Government in the Enterprise Act 2002 to direct the Competition and Markets Authority (CMA) to intervene in a merger on public interest grounds.

Specifically, the Order includes a new ground for intervention, namely “the need to maintain in the United Kingdom the capability to combat, and to mitigate the effects of, public health emergencies”. This ground supplements the three existing intervention grounds (national security, newspaper and media plurality, and financial stability).

The explanatory memorandum to the Order provides more information on how the new intervention power is likely to be used. For example:

  • The Government might choose to impose conditions on a merger to ensure that critical capabilities are not diminished.
  • The power might be used where an enterprise involved in combatting Covid-19 (such as a vaccine research company or a manufacturer of personal protective equipment (PPE)) is the target of a takeover.
  • Equally, it might be used to scrutinise the takeover of an internet service provider or food supply chain enterprise, given the potential for increased demand for internet services or disruption to food supply during a lockdown.

It is worth noting that the new power is not limited to the on-going Covid-19 pandemic, but would also extend to any public health emergency in the future.

The changes are part of an increased trend towards Government scrutiny of mergers and inward investment in the UK.

In 2018, the thresholds for merger control notifications in certain sectors (including military and “dual-use” products, computing hardware and quantum technology) were substantially altered, giving the Competition and Markets Authority the ability to intervene in many more cases. (See our colleagues' article here for more information.) Parliament is currently debating whether to expand this list further in respect of mergers involving artificial intelligence, cryptographic authentication and certain “advanced materials”.

And the Government still intends to introduce its National Security and Investment Bill in due course, which would give it the power to intervene in numerous types of inward investment that raise potential national security concerns. For more information on the Government’s longer-term proposals, see our previous Corporate Law Update.

Deeds were delivered when signed signatures pages were emailed

The High Court has held that an individual formally delivered four separate deeds containing personal guarantees when he sent scanned copies of the signed signature pages to the counterparties.

What happened?

Umrish Limited v Gill [2020] EWHC 1513 (Ch) concerned financing arrangements for an asset management business. The business sought funding from four investing companies. As part of the funding arrangements, the investing companies asked the sole shareholder in the business to provide four personal guarantees, one in relation to each investing company’s funding agreement.

The personal guarantees were to be executed as deeds. (A guarantee does not need to take the form of a deed, but it is common to frame a third-party guarantee as a deed to avoid questions over whether any consideration is given in exchange for the guarantee.)

In due course, the individual giving the guarantees (whom we will call “the guarantor”) signed the signature page for each guarantee, scanned the four pages in and emailed PDF copies of them to one of the individuals representing the investing companies. The funding arrangements went ahead.

Around two years later, when the funding arrangements came to be renewed, the investing companies’ representative asked for complete copies of each signed guarantee “for audit purposes”. At this point, discussions broke down and the parties decided to end the funding arrangements.

Legal proceedings commenced. Among other things, the guarantor argued that the personal guarantees were not effective because they had not been delivered. Under English law, a deed does not become effective until it has been both executed and delivered. The guarantor argued that, for delivery to have taken place, he would have had to hand over the complete, physical guarantees.

What did the court say?

The court disagreed.

The judge said it was plain that the guarantor had intended to deliver the deeds. The idea that the guarantor needed to hand over the full physical copies to effect delivery was “not realistic in the current age of instant communication”. Absent anything suggesting otherwise, if one person sends a scanned copy of their signature on an identified document to another person, they are indicating an intention to be bound by the terms of that document.

Under English law, it is possible to deliver a deed conditionally. This is known as delivering “in escrow”. In that case, the deed takes effect only when the conditions are satisfied (although, once those conditions are satisfied, the deed takes effect from when it was delivered).

However, the judge said there was nothing in this case to suggest the deed was being delivered conditionally. The guarantor’s email did not say it was being delivered conditionally, and the parties had finished negotiating the document and so were not intending to make any further amendments.

Here, what mattered was whether a “reasonable recipient in the position of the [investing companies]” would have understood that the guarantees were delivered unconditionally, rather than in escrow.

As a result, the guarantor was bound by the guarantees.

What does this mean for me?

The judgment here comes as no surprise. It is difficult to see how the guarantor was not delivering the deeds when he sent the signature pages over to the investing companies’ representative. It must have been obvious to anyone observing the transaction that the purpose of doing this was to secure the funding his business needed, which itself was conditional on him giving the guarantees.

But the judgment does raise a few knotty issues and, in some ways, it leaves more questions open than it resolves.

  • Execution. First, it is not clear from the judgment that the guarantor in fact executed the entire guarantees, rather than just the signature page. We know from case law (R (Mercury Tax Group Ltd) v HMRC [2008] EWHC 2721 (Admin)) that a deed is not effective unless a party executes the entire instrument, rather than merely part of it. Under Law Society guidance, a party should do this either by signing the entire instrument (either in hard copy or electronically) or by signing just the signature page, then attaching a copy of that signature page to an email along with an electronic copy of the original, unsigned document to create an electronic deed (the “Mercury protocol”).

However, neither of these approaches is mentioned in the judgment. We are left to assume that the guarantor executed the complete guarantees in physical form, then emailed copies of the signature pages. If that had not happened, the claimants might have had a tougher time.

  • Would the guarantees have been enforceable anyway? As noted above, under English law, a guarantee does not need to be made by way of deed. As long as the guarantee, or some memorandum of it, is in writing and signed, it can take the form of a simple contract. The courts have previously held that a guarantee can even be contained and signed within an email (Mehta v J Pereira Fernandes SA [2006] EWHC 813 (Ch)).

So, even if the guarantees had not been executed properly, or if the guarantor had not formally delivered them by emailing the scanned signature pages, it is quite possible that sending the copies of the signature pages would have been enough to create simple, electronic contracts of guarantee.

There would need to be some kind of consideration provided to the guarantor for the contracts to be enforceable, but it is perfectly tenable to argue that the provision of funding by the investment companies to the business was valid consideration for the guarantees. This kind of so-called “third-party consideration” is perfectly acceptable under English law.

The judge did not need to address this (and so didn’t cover it). But, in the context of the case, it would not have been surprising if he had found the guarantees to be enforceable in any event.

It is also worth noting the guarantor’s signature to the guarantees was witnessed by his wife. The court had no issue with this. This is not new law – it has long been legally acceptable, if often inadvisable and generally discouraged, for someone to witness their spouse’s signature – but it is useful to see a case in which the issue did not hinder proper execution.

Above all, the judgment does illustrate some of the complexities and difficulties that accompany signing formal legal documents. It is worth remembering the following when executing a deed:

  • Execute the entire instrument and not just the signature page. This can be done either by printing the entire document out and signing it, or by signing it electronically (normally by using an electronic signing platform, such as DocuSign).
  • If that is not possible, the document can be executed virtually under the Mercury protocol published by the Law Society. This allows the signatory to print out and sign only the signature page, but the signatory will need to be able to scan that print-out back in and attach it to an email.
  • When sending a copy of the executed deed, make it clear whether the deed is being delivered. Failure to do this risks the deed coming into force prematurely. To avoid this risk, deeds drafted by legal advisers normally state that they are delivered only when they are dated. However, this is a presumption and it is open to a court to find that a person intended to deliver a deed at an earlier point. Suitable wording in an email might read: “The attached copies of the signed deed are being sent for information purposes only and are not to be taken as constituting delivery of the deed.”
  • It is unusual nowadays for deeds to be delivered conditionally (in escrow). However, if the deed is to be delivered conditionally, make this clear in the email enclosing the signed copies. The email should also set out the conditions to the deed becoming effective (e.g. “This deed is delivered conditionally on all other parties to it executing it and delivering it”).
  • If any signatures need to be witnessed, follow the rules on witnessing. The witness must be physically present with the signatory when the signatory signs and must not be another party to the document or transaction. The witness should countersign the same original document (not a counterpart) and should do so either immediately, or no more than a short period of time, after the signatory signs. A spouse or relative can act as a witness, but this can raise questions of undue influence and so should be avoided except in exceptional circumstances. (The prevailing view is that the current Covid-19 pandemic is an exceptional circumstance.)

Also this week…

  • Corporate Insolvency and Governance Bill receives Royal Assent. The Corporate Insolvency and Governance Bill has received Royal Assent. The new legislation brings in temporary changes to the UK’s insolvency regime and the requirements for holding company meetings. For more information on how the new legislation affects company meetings and filings, see our previous Corporate Law Update.
  • Further Companies House guidance on accounts filing deadlines. Following its announcement in March that companies affected by Covid-19 can apply for a three-month extension to file their accounts, Companies House has published updated guidance on the process. The guidance now confirms that companies cannot extend their filing deadline beyond 12 months from their accounting reference date. If a company’s filing period is already extended to the maximum 12 months, Companies House will not grant any further extensions.
  • Companies House extends emergency filing service. Companies House has extended its emergency filing service, which allows businesses to file company forms on-line that would otherwise need to be filed in paper form. Companies can now file forms relating to changes in their constitution (Forms CC01, CC02, CC04, CC05 and CC06) using the service.