Corporate Law Update

In this week’s update: the High Court orders scheme creditor meetings to be held by phone, IA guidance on executive pay 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.

Court allows scheme meetings to be held electronically

The High Court has ordered that meetings of creditors on a scheme of arrangement can be held electronically by telephone without the creditors needing to come together physically.

What happened?

In the matter of Castle Trust Direct plc [2020] EWHC 969 (Ch) concerned four linked schemes of arrangement under which bonds issued by two companies would be converted into deposits with a third company, which was in the process of obtaining authorisation to become a bank.

As is required with a scheme of arrangement, the High Court was asked to make an order to convene meetings of the companies’ creditors (the bond-holders) to allow them to vote on the scheme.

The case gave rise to various interesting issues, but key among them was the fact that, due to the current lockdown restrictions in place in the UK as a result of the on-going Covid-19 pandemic, it was not possible for the companies’ creditors to attend the scheme meetings in person.

As a result, the companies asked the court to make an order allowing them to conduct the meetings and votes by telephone, with an accompanying opening address by webinar.

This required the court to consider an important question: do the creditors need to come together physically in order for a meeting to take place?

This is a question not just relevant to meetings of creditors or shareholders as part of a scheme of arrangement, but also to companies that need to hold an AGM or other general meeting. As we have been reporting, this has become increasingly relevant as many publicly traded companies approach their AGM season.

There has long been some doubt over whether “virtual-only meetings”, which do not take place in any single physical location with two or more people present, are valid. To date, the orthodox view has been that, in order to be valid, a meeting must occur in a “place”, and there is no “place of meeting” where the meeting is conducted purely electronically. (We are aware of only one attempt to convene a virtual-only AGM.)

The closest the courts have come to deciding this issue was some time ago, in Byng v London Life Association Ltd [1990] Ch 170, in which the court upheld a meeting that took place in a physical location, but in which several participants attended through by video link in a separate room. This has since become known by the term “hybrid meeting”.

What did the court say?

The judge ordered the meetings to be held by telephone.

In doing so, he relied heavily on Byng. He acknowledged that the circumstances in this case were different: there would be no physical meeting with some attendees participating remotely. Rather, all participants would be joining the meeting from different locations.

Nevertheless, he focussed on the purpose of a meeting at common law: to allow persons to “come together and consult with each other”. The word “meeting” should not be interpreted narrowly and should be understood in the context of this purpose.

In common with previous judges, he agreed that, where statute requires a “meeting”, this coming-together must happen, and it is not possible to substitute a meeting with an alternative arrangement. But, he said, Byng showed that the coming-together can be achieved by the use of technology.

He also acknowledged the comments in Byng that, for a meeting to be held electronically, the participants must be able to “hear and be heard and … see and be seen”. But, in an extension of this principle, he said that it was still possible for a meeting to be held “by telephone means accompanied by a webinar where not all creditors are in fact seen”. The critical element – the coming-together that facilitates consultation between meeting participants – could still be fulfilled by telephone.

In particular, in a boost for virtual-only meetings, the judge was content to grant the order despite the fact that there might not be two or more participants in any given physical location.

He did issue two small caveats. On a scheme of arrangement, the parties must convene a second court hearing after the creditor (or shareholder) meetings have taken place so that the court can examine the way the meetings were held and decide whether to sanction the scheme.

At this meeting, the judge said, the court will be “particularly concerned to ensure” that the technology worked properly and that there was, in fact, a coming-together. The court will need to be happy that there were no difficulties for meeting participants to hear, ask questions or express opinions. If there were to be any difficulties, the court might need to conclude that there was no effective coming-together (and, so, no meeting).

He also noted that this course of action was appropriate particularly in light of the current Covid-19 pandemic, and that it might not be appropriate in the future in relation to other companies.

What does this mean for me?

This is a significant step towards virtual-only meetings. That the court was prepared to convene meetings where the participants were potentially all in different locations – indeed, in circumstances in which they will not be able to see each other – is an important and pragmatic step forward.

This also potentially lays the groundwork for virtual-only general meetings and AGMs. It is important to remember that the law relating to scheme of arrangement meetings is distinct from that relating to company meetings (in particular, that they are governed by common law and not, in addition, the company’s articles). However, the two often walk hand in hand, and where (as here) the same general principles apply, the courts will readily import principles from one area of law into the other.

Companies that may now be tempted to hold a virtual-only meeting still need to consider a few things:

  • The court was prepared to sanction a virtual-only meeting because of the current lockdown restrictions. The judge’s comment that this may not be appropriate in all circumstances might suggest that companies must continue to look to a physical meeting as a first resort.
  • The judge’s willingness to sanction a telephone meeting was influenced by the profile of the creditors attending, more than half of whom were over 70 years old. The choice of technology employed may therefore need to suit the needs of the meeting constituents.
  • The court will, at the sanction hearing, scrutinise the conduct of the meeting to ensure the attendees were at all times able to participate. There is an inherent risk with a virtual-only meeting that, if the technology breaks down, the meeting will need to be adjourned (and the chair of the meeting may not always know at the time if this has happened).
  • Scheme meetings are convened by order of the court. The court plays a role in scrutinising the format of the meeting. This is rarely the case for general meetings, which are convened by the company with no judicial oversight. If the power to convene a virtual-only scheme meeting derives from the court’s jurisdiction, then arguably a company could not choose to do this. But that is not the tone of the judgment and there does not seem to be any reason to suspect this.

    However, it is worth noting that the court does have power under section 306 of the Companies Act 2006 to convene a general meeting of a company if it is “impracticable” to call the meeting in the manner in which the company’s meetings are usually called. This might conceivably provide a route for companies to apply to court to convene a virtual-only meeting.
  • The meeting may still need to take place at a particular location. Section 311 of the Companies Act 2006 requires the notice of a general meeting to state the “place of the meeting”. However, following this judgment, it may well be that the “place” of the meeting could simply be wherever the chair is located (even if the chair is alone), or perhaps even the electronic forum itself.
  • A company’s articles may require meetings to be held in a particular way. Indeed, they might effectively prohibit virtual-only meetings. It is therefore important to check the articles of association to see what is and is not permitted.

But these caveats should not be seen as insurmountable. They are a pragmatic response to the current circumstances. Although the matter is still not yet completely free from doubt, the court’s comments in Castle Trust Direct go a long way towards sanctioning virtual-only meetings and might even embolden some companies to start down this path.

Macfarlanes is proud to have advised the scheme companies on this application.

Investment Association provides guidance on executive remuneration during Covid-19

The Investment Association (IA) has published an update setting out shareholder expectations for executive remuneration at UK listed companies during the Covid-19 pandemic. The IA says its Principles of Remuneration remain a useful guide to shareholder expectations and good practice, but remuneration committees will need to balance incentivisation sensitively while management is being asked to demonstrate significant leadership and resilience.

The key points arising out of the update are as follows:

  • If a company suspends or cancels the dividend for its 2019 financial year, the board and remuneration committee should consider how to reflect this in their approach to executive pay.
  • Remuneration committees should not adjust performance conditions to account for the impact of Covid-19. Instead, they should engage with shareholders and use their discretion to “ensure a good link between pay and performance”.
  • Given the difficulty in setting meaningful three-year targets, committees should consider whether it is appropriate to make LTIP grants at the current time or instead to postpone their current grant.
  • If a company seeks additional capital from shareholders or accepts Government support (for example, by furloughing employees), this should be reflected in executive pay outcomes.
  • Companies that have already consulted with shareholders on changes to their remuneration policy should not need to re-write their policy, but companies that are yet to do so should consider postponing significant changes until there is greater clarity on the future market environment.

For more detail, please see our colleagues’ in-depth note.

Also this week…

  • BVCA publishes further Covid-19 impact report. The British Private Equity and Venture Capital Association (BVCA) has published a fifth report on the impact of the on-going Covid-19 pandemic on the private equity and venture capital industry.
  • Companies House launches emergency filing service. Companies House has launched an on-line emergency filing service to allow customers to file paper forms for which there is no on-line equivalent. The service does not yet accept all paper forms and is limited to applications to correct or remove information from the register (RP02A, RP02B, RP03, RP06, RP07 and RPCH01).
  • ICSA publishes guidance on dividend resolutions. ICSA: The Chartered Governance Institute has published new guidance on withdrawing or amending a resolution at an annual general meeting (AGM) to approve a final dividend. The note covers the chair’s discretion to withdraw or amend the dividend resolution, how to exercise proxy votes where the dividend is being reduced and whether the proposed withdrawal or amendment needs to be notified to the market.
  • FCA warns banks on equity mandates. The Financial Conduct Authority (FCA) has published an open letter to the CEOs of banks warning them not to use their existing lending relationships to exert pressure on corporate clients to secure roles on equity mandates which they would not otherwise have won. The FCA has received “credible reports” of a small number of banks doing this, which may be in breach of FCA rules and Principles.
  • ICGN writes to boards on Covid-19 priorities. The International Corporate Governance Network (ICGN) has written an open letter to companies, regulators and stakeholders. The letter sets out governance priorities for executive management, board directors and investors to safeguard company sustainability during the on-going Covid-19 pandemic.
  • Covid-19 update for community interest companies (CICs). The Office of the Regulator of Community Interest Companies has published guidance on how the on-going Covid-19 pandemic may affect CICs, including in relation to filing documents and accounts.