Corporate Law Update

In this week’s update: a request to inspect a company’s register was proper, the FCA fine an individual for failing to notify dealings in his company’s shares, ESMA reports on APMs and new rules on reporting discrepancies in a PSC register.

Request for copy of company’s shareholder register was “proper”

The High Court has said that a request to inspect a company’s register of members in order to convene a general meeting to oust the directors and managing agent was not improper.

What happened?

Houldsworth Village Management Company Limited v Barton [2019] EWHC 3590 (Ch) concerned the management company for a residential apartment complex in Stockport, England. Each tenant of an apartment in the complex was also a member of the management company. The management company engaged a third-party managing agent to provide the management services.

In May 2019, one of the tenants – Mr Barton – sent a request to the company to inspect its register of members. The purpose stated in the request was ultimately to seek a general meeting of the company’s members to consider replacing the company’s directors and the managing agent.

Under section 116 of the Companies Act 2006, any member (usually a shareholder) of a company can ask to inspect its register of members free of charge. (Non-members need to pay a fee.) Under section 117, a company must comply with a request within five working days. Alternatively, it can apply to the court to refuse the request if it believes the request has not been made for a “proper purpose”.

Importantly, the company must prove that a request is actually improper based on the facts (The Hut Group v Zedra (2017)). It is not enough to show the court that the request might or could be improper.

The company conceded that seeking to replace the directors was a proper purpose, but it argued that replacing the managing agent was not.

What did the court say?

The court disagreed. It said the company had not shown that the request was improper.

The judge acknowledged that appointing and removing the managing agent was company (rather than member) business decided by the management company’s board. However, he noted the company’s objects were to manage the apartment complex, and so it was entirely legitimate and proper for members to seek to replace the board with one that would replace the managing agent. That was a kind of “constitutional change” which was appropriate in the context.

Interestingly, Mr Barton had previously been involved in similar proceedings in relation to an apartment block in Newcastle upon Tyne. However, in that case, his request to inspect the management company’s register stated that the purpose was to “contact fellow members to seek their views” on matters relating to the management company.

The judge in that instance decided that his request was not proper, because, in reality, he had been attempting to advance his interests as a tenant of one of the apartments, rather than as a member of the management company, and simply to harass the management company. That was different from his request to the Houldsworth management company, which related to changing the board.

What does this mean for me?

Although the facts of this case are quite specific, this is an interesting development in how the courts will consider a request to access a company’s register of members. Access requests appear in various contexts, not only in disputes such as this, but also (for example) on public company takeovers and in activist situations.

The decision emphasises how important it is to phrase an access request carefully in the context of the company’s business and the member’s status. Linking the purpose of the request to the factual context could be critical to its success or failure. The following may be useful things to consider:

  • Does the purpose of the request benefit the company’s members in some way? A request does not need to be made with other members’ interests in mind, but the courts will not view favourably attempts to pursue purely personal matters or harass a company’s board, nor are they likely to allow someone to dredge up historic matters that have gone stale.
  • Be careful about including multiple purposes. If any one of those purposes is improper, the request will be denied, even if all of the others are perfectly legitimate. It may be better to set out one clearly justified purpose in the access request.
  • Check the “proper purpose” guidance published by The Chartered Governance Institute (ICSA). That guidance (available free from ICSA after registering on its website) sets out various cases that ICSA considers “proper”. The courts will take the ICSA guidance into account when deciding whether a request is proper.
  • If the applicant is a member of the company, are they making the request in their capacity as a member? The purpose of the request must relate to a person’s rights as a member and not some other capacity (e.g. as a creditor, supplier, employee or tenant).
  • If the applicant is not a member, how will granting the request affect the members? In this case, the court will focus less on the right of a person to gain access to the information and more on the potential harm to the company.

FCA issues fine for failure to report PDMR dealings under MAR

The Financial Conduct Authority (FCA) has imposed a fine on a senior executive employee of a listed company for failing to notify the FCA of dealings in the company’s shares.

Under article 19(1) of the EU Market Abuse Regulation (MAR), a person who discharges managerial responsibilities (or PDMR) of a publicly traded company must notify the company and the FCA within three business days if they deal in the company’s securities above an annual threshold of €5,000.

A company’s directors are all PDMRs. In addition, a person who is not a director can be a PDMR if they are a senior executive, have regular access to inside information and have the power to take managerial decisions affecting the entity’s future development and business prospects.

The executive sold shares in the company (on three occasions) for a total just over £71,000, but he did not notify the company or the FCA. (He also failed to seek clearance for the sales under the company’s share dealing policy, but this did not amount to a breach of MAR.) As a result, he breached article 19(1) of MAR. The FCA imposed a fine of £45,000, discounted from £64,300 for early settlement.

This is the first time the FCA has brought enforcement action against a PDMR for breaching article 19(1) of MAR. The facts of the case are relatively clear and straightforward. What is more interesting are the reasons the FCA gave for why it considered the executive to be a PDMR:

  • The executive was not a board director, but he was the “managing director” of the company’s logistics division.
  • He was also one of four members of the company’s executive committee, alongside the CEO and two other senior executives. Through the excom, he had regular access to inside information, including the group’s monthly management accounts.
  • The company had previously informed him that, due to this access to inside information, it considered him to be a PDMR. It also sent him information on MAR and its share dealing policy with acknowledgements which he countersigned.

The decision underlines the importance for executives of complying with a company’s securities dealing policy. Had the executive done so in this case, the company would have been able to remind him that he was a PDMR and the appropriate notifications would most likely have been made.

Other items

  • ESMA reports on APMs. The European Securities and Markets Authority (ESMA) has published a report on the use of alternative performance measures (APMs). These are financial measures of performance that are not defined in a financial reporting framework. ESMA found that the use of APMs is widespread in all sectors, with the most popular APMs being EBIT, EBITDA and net debt. However, of the management reports and ad hoc disclosures reviewed by ESMA, only just over 10% in each case complied with all of the principles in ESMA’s Guidelines on APMs. ESMA is therefore encouraging issuers to improve the explanations of APMs used in their results.
  • New requirement to report beneficial ownership discrepancies. New regulations have come into effect which require persons that carry out customer due diligence on a UK legal entity to check that entity’s PSC register and report any discrepancies they discover through due diligence to Companies House. The obligations apply only to “relevant persons”, which include credit and financial institutions, audit and accountancy firms, law firms, insolvency practitioners, tax advisers, trust and company services providers, and estate agents.