Corporate law update
- The European Commission publishes a notice on the key changes to company law when the UK/EU transition period ends
- New guidance is published on holding shareholder meetings under the new Corporate Insolvency and Governance Act 2020
- The court orders a deceased shareholder’s executors to be registered as shareholders pending a grant of probate
- Companies House further extends its on-line emergency filing service
- The PLSA and the Investor Forum publish new joint guidance for pension schemes on effective stewardship
- The FCA publishes its fees for 2020/21, including for applications to approve “exempted documents” on a securities-exchange takeover
- The FRC publishes a review of going concern policies and procedures implemented by audit firms during the Covid-19 pandemic
- The FRC also publishes new “principles of operational separation” for the Big Four audit firms
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.
The European Commission has published a notice to stakeholders outlining the consequences to company law of the UK ceasing to be subject to European Union (EU) law.
Although the UK left the EU on 31 January 2020, the majority of EU law continues to apply in the UK during the UK/EU “implementation” or “transition” period. The implementation period is due to end on 31 December 2020, at which point EU law will cease to apply in the UK except to the extent the UK and the EU agree.
We have outlined the effects of a so-called “no-deal Brexit” on UK company law in previous editions. The notice provides a useful opportunity to recap on the principal consequences.
- Legal personality and limited liability. Companies incorporated in the UK have separate legal personality (they can hold assets and enter into contracts in their own name) and, in most cases, their members (usually shareholders) enjoy limited liability. Under the EU principle of “freedom of establishment”, this is recognised by other EU Member States.
Once freedom of establishment ceases to apply to the UK, EU Member States are no longer required to recognise the legal personality and limited liability of UK companies and will determine this question according to their own national laws. This might result in shareholders of certain UK companies whose central place of management is within the EU losing their limited liability.
- Cross-border mergers. Cross-border mergers (CBMs) under EU law will no longer be possible into or from the UK. Any CBM in progress at the end of the implementation period will not take effect under EU law. In theory, a CBM could take place outside of EU law if the national law of each country involved allows it. However, aside from the EU regime (which will no longer apply in the UK), UK law does not allow UK companies to merge or migrate to another country.
- European companies. It will no longer be possible for a European company (“societas europaea” or “SE”) to be registered in the UK. The same applies to European Economic Interest Groupings (EEIGs) and European Cooperative Societies (SCEs). When EU law ceases to apply in the UK, EU Member States will recognise any SEs or EEIGs registered in the UK as UK domestic entities in accordance with their own national laws.
Under UK Brexit legislation, an SE registered in the UK at the end of the implementation period will automatically convert into a “UK societas”, with the ability subsequently to convert into a UK public limited company (PLC). Similarly, an EEIG registered in the UK will convert into a UK economic interest grouping (UKEIG).
The notice also clarifies that certain other aspects of EU law will no longer apply to UK companies. These include EU rules on company filings and transparency, the regulation of takeovers, shareholder rights and engagement, and corporate governance. However, at the point at which the UK ceases to be subject to EU law, these rules will be preserved in UK law, and the UK Government has not indicated any particular intention to change them.
The Chartered Governance Institute and the City of London Law Society have published joint guidance on holding shareholder meetings under the new Corporate Insolvency and Governance Act 2020 (CIGA).
The guidance has been drafted with the support of the GC100, the Investment Association and the Quoted Companies Alliance (QCA) and has been endorsed by the Financial Reporting Council (FRC) and the Department for Business, Energy and Industrial Strategy.
Under CIGA, companies and certain other types of corporation can now hold shareholder and other member meetings by purely electronic means (a “virtual meeting”) until 30 September 2020. The Government has the power to extend this period to 5 April 2021 at the latest.
They key points arising from the guidance are set out below.
- CIGA does not stipulate how a company can hold a virtual meeting, leaving companies free to choose. This could include by way of a telephone call or a video conference.
- To safeguard the health and well-being of members, companies may choose to hold a meeting with only the minimum number of attendees required to form a quorum.
- Shareholders who are not allowed to attend the meeting must still be allowed to vote. This could include by allowing shareholders to appoint the chair of the meeting as their proxy to vote in accordance with their instructions, or by allowing voting through an online facility or an app.
- Companies should nonetheless engage appropriately with shareholders, such as by holding an online shareholder Q&A or an additional shareholder event once appropriate to do so.
- CIGA does not allow a company that has already issued its notice of general meeting to change the format of its meeting. This will be possible only if the company’s articles allow it to. Companies in this position should seek legal advice on what possible options are available to them.
CIGA does not allow companies to hold virtual board meetings. Companies will need to examine their articles of association to decide whether (and, if so, how) they can do this.
In Williams v Russell Price Farm Services  EWHC 1088 (Ch), the High Court made an order to register the executors of an estate where the sole member and director had died and the application for grant of probate was unlikely to be made in the near future.
The deceased individual had been the sole shareholder and director of a company that carried on an agricultural business. On his death, his shares in the company were transmitted to the executors of his will. However, because he had been the only director of the company, there was no-one able to confirm the transmission and update the company’s share register (its register of members).
The situation was further complicated by the fact that the individual’s estate was extensive and a number of valuations needed to be carried out. This meant that the application for (and grant of) probate would be significantly delayed. Normally, a company’s directors will need to see evidence of a grant of probate before recognising the transmission of shares to a person’s executors.
However, the company was at its busiest time and needed to continue to pay suppliers and its employees. Its bank accounts were effectively frozen, which had created a risk of the business collapsing.
The executors therefore applied to the court under section 125 of the Companies Act 2006 to rectify the company’s share register. Section 125 allows the court to rectify a company’s register of members if a person’s name is omitted from the company’s register “without sufficient cause” or if there is “default” or “unnecessary delay” in registering that someone has ceased to be a shareholder.
Following this, they would then be able to pass a resolution to appoint new directors and continue to operate the company.
The executors needed to persuade the court to grant the order notwithstanding that there was still no official grant of probate. Normally, a court will only grant an order to register a person’s executors as shareholders if a grant of probate or letters of administration are provided.
What did the court say?
The court granted the request and ordered that the executors be registered as the new shareholders.
In itself, this is not surprising. We saw similar situations recently in Kings Court Trust v Lancashire Cleaning Services Ltd  EWHC] 1094 (Ch) and Ellott v Cimarron  EWHC 3872 (Ch), on both of which we reported in 2019. In those cases, the court made an order under section 125 without seeing the grant of probate because the company in question had no director to operate its bank accounts and so was at imminent risk of being wound up.
In this case, a key distinction was the potential time frame for the probate application. For example, in Kings Court, the application was made while the court proceedings were ongoing. However, in this case an application would not be feasible for some time.
To prevent the executors from being registered as shareholders but subsequently disclaiming their appointment, the judge required them to give formal undertakings that they would not renounce probate, they would apply for it as soon as possible and they would pay all necessary taxes.
What does this mean for me?
This judgment shows once again that the English courts are prepared to deal pragmatically with logistical constraints in the face of the potential insolvency of a business.
In this case, the executors and beneficiaries of the will were clear, and there was no likelihood of the executors renouncing probate. The request for an undertaking was a sensible way of ensuring that the executors could carry out their duty whilst ensuring that the court had exercised proper scrutiny.
But it is worth noting that this was an unusual case. If the company had not had imminent payments to make, or if there had been uncertainty or dispute surrounding the executors’ appointment, the court may well have been reluctant to grant the order.
Although these seem like unusual circumstances, the spate of recent cases involving the death of a sole shareholder and director of a company, and the subsequent issues around probate and transmission of shares, show that this is far from an isolated incident. Companies with a single individual as both shareholder and director are common, from small one-person businesses to personal service companies.
Ways to guard against or deal with this kind of situation might include the following.
- Ensure the company has at least two directors, so that there is no vacuum and the company can continue to operate if one of the directors dies.
- Consider having a second shareholder, so that, if the main individual shareholder dies, there continues to be another member of the company who can pass resolutions and appoint new directors without having to go to court. The second shareholder could be a trusted person, a family member or a nominee or family trust.
- Ensure the company’s articles of association allow members to appoint and remove directors by notice to the company. This may allow any surviving member to re-constitute the company’s board if the main individual shareholder dies. Any such right would need to be crafted carefully to ensure it is not open to abuse.
Also this week…
- Companies House further 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 a resolution to amend a company’s constitution, as well as new articles of association, through the service.
- PLSA and Investor Forum publish stewardship toolkit. The Pensions and Lifetime Savings Association (PLSA) and the Investor Forum have jointly published a new guide to assist pension schemes with delivering effective stewardship. The guidance focuses on key questions schemes need to ask their asset managers to ensure they are engaging effectively on their behalf and on behalf of savers.
- FCA publishes fee for “exempted documents”. The Financial Conduct Authority (FCA) has published Policy Statement PS20/7, setting out its regulated fees and levies for 2020/21. In particular, the statement confirms that the FCA has amended its FEES manual to confirm that the fee payable for an application to approve a “specified exempted document” – that is, a document that can stand in for a prospectus on a securities-exchange takeover or merger – is £15,000.
- FRC review of going concern policies during Covid-19. The Financial Reporting Council has published a review of the policies and procedures auditors have been using during the on-going Covid-19 pandemic to assess whether companies are trading as a “going concern”. The review covered the policies and procedures of the UK’s seven largest audit firms in accordance with ISA (UK) 570. It found that the additional policies and procedures introduced were appropriate and reasonably consistent across those firms.
- FRC publishes principles of separation for audit firms. The Financial Reporting Council (FRC) has published new “principles of operational separation” for the audit practices of the Big Four audit firms. The principles follow the recent independent Kingman and Brydon reviews and the review by the Competition and Markets Authority into competition in the audit sector. The purpose of the principles is to ensure that audit practices focus above all on delivering high-quality audits in the public interest and do not rely on persistent cross-subsidy from the rest of the audit firm.