Corporate law update
- The Corporate Insolvency and Governance Act 2020 comes into effect, with changes to insolvency law and company meetings
- The Government extends various filing deadlines for companies, LLPs and other entities
- New guidance is published on the Government’s ability to intervene in takeovers with a public health emergency dimension
- The FCA censures a company for historic market abuse but declines to impose a penalty
- The Institute of Directors launches its Centre for Corporate Governance
- Companies House publishes guidance on the accounts filing deadline extension for public companies
- The International Corporate Governance Network is consulting on its Global Governance Principles
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.
Corporate Insolvency and Governance Bill receives Royal Assent
As we reported last week, the Government’s new legislation implementing temporary measures for insolvency procedures and company meetings during the on-going Covid-19 pandemic has received Royal Assent.
The Corporate Insolvency and Governance Act 2020 (CIGA) came into force on Friday, 26 June 2020. It makes the following changes:
Until 30 September 2020, companies and certain other corporate bodies can hold virtual meetings. This includes both general meetings of their members and to “class meetings” (i.e. meetings of a certain subset of the corporation’s members).
This applies to 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.
CIGA allows the Government to extend this period in three-month blocks up to 5 April 2021.
During this period:
- Meetings do not need to be held in any particular place, and there is no need for any particular number of people to be in the same place.
- Meetings can be held, and votes taken, electronically or by any other means.
- Members of the corporation (e.g. shareholders) have no right to attend the meeting in person. They remain entitled to vote, but not by any particular means (e.g. a show of hands).
- CIGA gives the Government 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 override anything in the corporation’s constitution or in legislation. They also apply to all meetings since 26 March 2020, effectively “ratifying” any meetings that have been held electronically since then. (Before CIGA came into force, there was some doubt over whether these meetings would be effective.)
It is important to note that these provisions do not apply to board meetings. Companies will need to check their articles of association to see whether virtual board meetings are permitted.
Annual general meetings (AGMs)
Public companies (whether listed or not) and certain other corporate bodies that need to hold an annual general meeting (AGM) between 26 March 2020 and 30 September 2020 can now hold their AGM any time on or before 30 September 2020.
CIGA gives the Government power 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.
Again, these provisions override anything in the corporation’s constitution or in legislation.
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 listed public company will need to consider when any standing 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.
Where a public company is required to file its accounts at Companies House after 25 March 2020, it now has until 30 September 2020 (or, if earlier, 12 months after its financial year-end) to do so.
CIGA also allows the Government (until 5 April 2021) to extend the filing deadline for a range of routine filings by companies, limited partnerships (LPs), limited liability partnerships (LLPs) and European companies (SEs). The Government exercised this power on 26 June 2020. For more information, see the item below.
Temporary insolvency-related changes
CIGA also makes a host of changes in relation to insolvency law.
- It is not possible to present a winding-up petition based on a statutory demand served between 1 March and 30 September 2020. Moreover, a creditor who presents a winding-up petition (on other grounds) before 30 September 2020 must establish that the company’s inability to pay its debts is not related to Covid-19, or that its insolvency would have occurred regardless of Covid-19. Even then, there are further restrictions limiting the court’s ability to issue a winding-up order.
- Company directors now have limited and temporary protection against liability for wrongful trading where a company enters insolvent liquidation. The court will assume that a director is not responsible for any worsening of the company’s or its creditors’ financial position between 1 March 2020 and 30 September 2020. But this protection does not affect other kinds of personal liability of directors, including for breach of duty to the company.
- CIGA also allows the Government to change or disapply the duty of a company director or an LLP member under the Insolvency Act 1986 or the Company Directors Disqualification Act 1986. This power can be exercised until 30 April 2021, but only to “take due account of the effects of coronavirus on businesses of the economy of the UK” and only after considering the interests of debtors, creditors and employees.
Permanent insolvency-related changes
CIGA introduces some other, major reforms to insolvency law that had been proposed in consultation some time before the Covid-19 pandemic begin and which will continue after the pandemic is over.
- In certain circumstances, companies can now obtain a free-standing moratorium preventing creditors from bringing enforcement action and allowing the company to continue to trade under the control of its existing board without entering into a formal insolvency procedure. To obtain the moratorium, an appointed insolvency practitioner must make a statement that, in their view, moratorium will likely result in the rescue of the company as a going concern.
- CIGA introduces a new restructuring plan for companies in financial distress. The plan is similar to existing schemes of arrangement under Part 26 of the Companies Act 2006. However, two key differences are that there is no requirement for approval from a majority in number of creditors or members of a particular class, and the court can sanction the scheme even if a particular class of creditor of member votes against it (the so-called “cross-class cram-down”).
- Finally, so-called “ipso facto” clauses can no longer be exercised in certain circumstances. These are contractual clauses that allow a supplier of goods or services to terminate a contract, accelerate payment or cease supplying goods or services merely because the counterparty enters a formal insolvency process.
At the same time, the Government has published the Limited Liability Partnerships (Amendment etc.) Regulations 2020, which apply the insolvency-related changes in CIGA to limited liability partnerships (LLPs).
Government extends various company filing deadlines
On 26 June 2020, the Government used its powers under the Corporate Insolvency and Governance Act 2020 (CIGA) to publish regulations extending various deadlines by which companies, limited liability partnerships (LLPs) and certain other legal entities must file documents at Companies House.
The Companies etc. (Filing Requirements) (Temporary Modifications) Regulations 2020, which make the changes, came into force on 27 June 2020. Key filing deadline changes include the following:
- A company now has 42 days (instead of 14 days) to notify Companies House of a change in the place where it keeps its statutory registers.
- A company now has 42 days (instead of 14 days) to notify Companies House of any changes to its directors or secretary or their respective details. (A similar extension applies to European companies (SEs).)
- Private companies and LLPs now have 12 months (instead of nine months) from their accounting reference date to file their statutory accounts. The equivalent deadline for public companies has been extended from six months to nine months.
This sits alongside the general extension for public companies in CIGA, under which (broadly speaking) a public company that would otherwise have been required to file its accounts before 30 September 2020 can instead file its accounts any time on or before that date.
- A company now has 42 days (instead of 14 days) to deliver its annual confirmation statement to Companies House.
- The period of time for registering a charge created by a company is now 31 days (instead of 21 days) from the date on which the charge was created.
- Companies and LLPs now have 42 days (instead of 14 days) to update their PSC register, and a further 42 days (instead of 14 days) to inform Companies House of the changes to their persons with significant control. These extensions are significant and take the maximum time from becoming aware of a change to notifying the change from 28 days to 84 days.
- A limited liability partnership now has 42 days (instead of 14 days) to notify Companies House of any change in its members.
- A limited partnership now has 42 days (instead of seven days) to notify Companies House of any change in its registered particulars (including any change in its name or partners).
- An overseas company now has six months (instead of three months) to deliver a copy of its accounts to Companies House. As before, that period begins from the point at which it makes those documents public in accordance with its parent law.
The Regulations expire on 5 April 2021, meaning that any deadline that falls after that date will not be extended. However, the accompanying explanatory memorandum explains that any deadline that would otherwise have expired before 5 April 2021 will be extended beyond that date.
Guidance on merger interventions to mitigate health emergencies
Last week we reported that new legislation had come into effect allowing the Government to intervene in mergers and takeovers that might threaten the UK’s ability to combat a public health emergency (such as Covid-19). This new “public interest consideration” accompanies existing powers to intervene in mergers that threaten media plurality, the financial system or national security.
The Government has now published guidance on the new public interest consideration. The guidance makes the following key points.
- Although prompted by the Covid-19 pandemic, the new power is not limited to the on-going pandemic and will be available in relation to future public health emergencies (PHEs).
- The Government’s priorities in intervening in mergers will be to ensure that mergers or acquisitions of companies related to a PHE response are not against the public interest, and that existing capability in the UK to respond to a PHE is not undermined.
- The note cites vaccine researchers, manufacturers of ventilators, antibody test kits and personal protective equipment (PPE), drug manufacturers, medical supply companies, delivery companies, internet service providers and food supply chain companies as potential businesses that could be relevant under the new power. However, this is not an exhaustive list and the power could be exercised in relation to a business in any particular sector that may be relevant.
- In an interesting example, the guidance suggests that the Government might be considering intervening in a proposed takeover of a UK-based antibody test kit manufacturer in order to impose conditions designed to ensure that UK residents receive antibody tests in preference to persons overseas.
- The Government also considers “repurposable capabilities” to fall within the scope of the new power. This would allow it to intervene in the takeover of (for example) an engineering company that designs car parts but which could divert its capabilities to manufacturing ventilators.
- The guidance encourages parties to a transaction that may fall within the new power to notify the Government of the transaction, although, as with other mergers, non-notified transactions can be “called in” if appropriate.
- The guidance notes that the Government has intervened in mergers on only 20 previous occasions and has never blocked a merger outright. It states that the introduction of the new public interest consideration does not represent any substantial shift in Government policy.
- There are no changes to the procedural aspects of a Government intervention, nor to the UK’s domestic merger control regime or the EU merger control regime more generally.
Public censure but no financial penalty for historic market abuse
The Financial Conduct Authority (FCA) has publicly censured an AIM-traded company for historic financial misstatements that amounted to market abuse. However, in view of the company’s co-operation and the scheme it has put in place to offer compensation, it has decided not to impose a financial penalty.
The company previously published unaudited half-yearly financial results for the six months ending 30 September 2015 and audited year-end results for the 12 months ending 31 March 2016. Those results stated the company’s net debt and its cash and cash equivalents.
In November 2016, the company announced that its audit committee was conducting an internal review of its 2016 half-yearly results and that it was therefore delaying publication of its half-yearly results to 30 September 2016.
In December 2016, it announced that, following that review, its March 2016 full-year and September 2016 half-yearly results had understated its net debt at those points. The announcement did not mention the company’s half-yearly results to 30 September 2015.
The FCA initiated its own review of the company’s net debt and its cash and cash equivalents as stated in its September 2015 half-yearly results and March 2016 full-year results. It found that, in both cases, the company’s net debt had been significantly understated and its cash and cash equivalents significantly overstated.
As a result, the misstated results caused the company’s shares to trade at a higher value than that at which they should have traded, giving a false and misleading impression as to their value.
What did the FCA say?
The FCA concluded that the company either knew or ought reasonably to have known that the net debt and cash/cash equivalents information in those results would have this effect.
The notice states that the company co-operated with the FCA and has taken “extensive steps to remedy its failings”, including commissioning its own review, making improvements to its internal systems and controls, and taking reasonable steps to compensate investors.
As a result, the FCA decided that it was preferable to censure the company, rather than impose a fine that could disrupt the company’s business and customers. A key part of the FCA’s reasoning was that the company’s customers include numerous NHS Trusts and that it provides vital services in relation to the on-going Covid-19 pandemic.
What does this mean for me?
The FCA’s decision shows how invaluable it is for publicly traded companies to investigate potential financial irregularities proactively, (if necessary) bring them to the regulator’s attention and provide it with full co-operation and assistance. Doing so will maximise the likelihood of reducing the severity of any financial penalty. In this case, the FCA was clearly impressed by the measures the company had taken to compensate investors, describing its actions as “exemplary”.
However, companies should not assume that pro-active measures and co-operation will automatically relieve them of a fine. The FCA has made it clear in its notice that the circumstances of this case were “unique”. And, although mentioned as only one of the factors the FCA took into account, the backdrop of the Covid-19 pandemic and the specifics of the company’s operation were clearly important factors that hopefully will not be relevant to cases in the future.
It is worth noting that the offences took place under the old market abuse regime in the Financial Services and Markets Act 2000. However, we see no reason why the outcome would have been any different under the current regime in the Market Abuse Regulation (MAR).
Also this week…
- IoD launches Centre for Corporate Governance. The Institute of Directors has launched a new initiative that seeks to explore how companies are, and could be, run. The Centre for Corporate Governance is intended to commission and steer research into issues facing boardrooms as the UK emerges from Covid-19. Initial areas of investigation will include sustainability, the feasibility of stakeholder-oriented governance, and the implications of emerging technology, such as AI, for board practice.
- Companies House guidance on accounts filing extension. Companies House has published a guidance note on the extension for public companies and UK-registered European companies (SEs) to file their statutory accounts. The note provides examples to assist with calculating a company’s new deadline.
- ICGN consults on governance principles. The International Corporate Governance Network has launched its regular review of its Global Governance Principles (GPP). The consultation asks investors whether the GPP are a useful resource and how different organisations use them. The deadline for responses is 15 September 2020.