Corporate Law Update
- A notice of claim under an indemnity was out of time because it was not sent “as soon as possible”
- The Law Society publishes updated guidance on electronic signing in the context of Covid-19
- The FRC publishes updated Q&A on company filings and general meetings
- The FRC has published guidance to issuers on interim results during the Covid-19 pandemic
- The FRC publishes some editorial amendments to its guidance on a company’s strategic report
- The FRC has also published a review of audit quality indicators (AQIs)
- ESMA is consulting on changes to the EU’s SME growth markets regime
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 High Court has held that a notice of claim under an indemnity given in a share sale agreement was out of time because it was not given “as soon as possible”.
Towergate Financial (Group) Ltd v Hopkinson  EWHC 984 (Comm) concerned the sale of the shares in a financial advisory business by some individuals in 2008.
As part of the sale, the sellers agreed to indemnify the buyer and its group companies against any claims arising out of investigations launched by the Financial Services Authority (FSA) (now the Financial Conduct Authority) into (among other things) mis-selling of certain financial products.
The share purchase agreement (SPA) also contained a limitation on the sellers’ liability, which read as follows (with our emphasis):
6.7 The Purchaser shall not make any Claims against the Warrantors nor shall the Warrantors have any liability in respect of any matter or thing unless notice in writing of the relevant matter or thing [. . .] is given to all the Warrantors as soon as possible and in any event [. . .] in relation to a claim under the indemnity [. . . ] on or before the seventh anniversary of the date of this Agreement.
In 2015, the buyer served notice on the sellers under clause 6.7, stating that it intended to seek indemnification against mis-selling in relation to certain historic pension benefit transfers. Importantly, that notice was served only shortly before the seventh anniversary: the deadline for serving notice.
Those who have been reading our Corporate Law Update for some time may recall that the parties had already litigated over the validity of this notice once, back in 2018. In that case, the sellers had argued that the notice of claim was invalid because it didn’t contain the required level of detail of the claim. The court rejected this argument.
This time, the sellers rejected the claim on a different ground. They said that although the buyer had served notice before the seventh anniversary, it had not done so “as soon as possible”, and so the sellers were not liable.
The buyer argued that the only condition to a notice being valid was that it was given before the seventh anniversary, and it had served notice within this deadline. In particular, it said that any requirement to give notice of an indemnity claim “as soon as possible” was not a condition precedent and failing to comply with it would not render the notice invalid.
What did the court say?
The court found the notice to be invalid.
The judge said that the words “as soon as possible” did introduce a condition precedent, so that the buyer had to satisfy two conditions in order for the notice to be effective: it had to serve it “as soon as possible”, and that service had to occur on or before the seventh anniversary of the SPA.
In reaching this conclusion, she applied the tests established in the trinity of cases that now form the basis of contractual interpretation – Rainy Sky SA v Kookmin Bank  UKSC 50, Arnold v Britton  UKSC 36 and Wood v Capita Insurance Services Ltd  UKSC 24.
She said that the clause “on its face … plainly imports a dual condition precedent”. Its wording was clear, grammatical and workable. There was no justification for removing the words “as soon as possible”, which would do “striking violence” to the clause.
The judge did entertain an argument based on an earlier case – AIG Europe (Ireland) Ltd v Faraday Capital Ltd  EWHC 707 (Comm) – in which the court found that a requirement to give notice of an insurance claim “as soon as reasonably practicable and in any event within 30 days” meant solely that the notice had to be given within 30 days.
However, the period of 30 days in that case was strikingly shorter than in the current case, and a reader would be forgiven for assuming that the 30 day-period was the way to give notice “as soon as reasonably practicable”.
Moreover, in that case, the two time periods – 30 days and “as soon as reasonably practicable” – began from the same point, namely the date on which the insurable loss occurred. However, in this case, the seven-year period began from one point (the date of the SPA) and the requirement to serve notice “as soon as possible” began at a different point (when the right to claim under the indemnity arose). This suggested the two periods were intended to be different.
What does this mean for me?
This is another example of how it is important to ensure that commercial contracts are drafted clearly and carefully.
In some senses, the defendants were fortunate. A clause of this kind that imposes a time limit of claims is a kind of exclusion clause. If there is any ambiguity in it, it will be interpreted against the person who is looking to rely on it (contra proferentem), which, in this case, was the defendants. But the court clearly felt that there was no ambiguity in the clause.
However, the outcome in cases like this is far from certain. The courts will be prepared to take the context of a clause into account when interpreting it. Only last month we reported on a case in which the court said that a contractual obligation to deliver audited post-completion accounts by 30 June 2019 in fact amounted to an obligation to deliver the accounts once they had been audited, and not by 30 June 2019, as this is what the parties had intended.
The case also highlights the risk to a buyer of shares or a business of including rather “loose” language in a limitation clause such as this. Although the parties had agreed a seven-year long-stop date for claims under the indemnity, the words “as soon as possible” effectively imposed a rolling time limit within that seven-year period, giving the buyer far less time to bring a claim than it anticipated.
If faced with drafting such as this, a buyer should amend the SPA to make it clear that failing to give notice of a claim (whether an indemnity claim or a warranty claim) “as soon as possible”, or within a particular period of time after becoming aware of the claim, will not invalidate the notice or prevent the buyer from bringing proceedings.
The Law Society has published a new guidance note setting out its position on virtual execution and electronic signatures during the Covid-19 pandemic. The note brings together previous guidance by the Society on these topics. The Society has also updated its practice note on executing a document using an electronic signature.
The key points arising from the new and update guidance are as follows:
- Where a document may need to be submitted to a registry or notary or sent overseas, parties should check first whether an electronic signature will be acceptable. The Society notes that HM Land Registry has its own rules regarding electronic signatures and virtual execution.
- In many cases, execution using an authenticated electronic signature will deliver much greater transactional certainty and security than other methods previously upheld by the courts.
- The Society remains of the view that, where a signature needs to be witnessed, it is best practice for the witness to be physically present and not to witness by video link. However, in the current circumstances, the Society recognises that it may not be possible to follow best practice, suggesting that so-called “video witnessing” would be permissible.
The Society’s comments on video witnessing are notable. Video witnessing has become increasingly topical since the on-set of the Covid-19 pandemic, with many people now unable to locate an independent witness when signing documents.
However, there remains significant doubt over whether video witnessing is legally valid.
The Law Commission (in its September 2019 report on electronic execution) took the view that a witness must be physically present with a signatory when the signatory signs the document. This view is supported by the Bar Council of England and Wales and by HM Land Registry, which has said it is “unsafe” to accept any form of witnessing other than contemporaneous, physical witnessing.
The only case law on this point is a non-binding decision of the First-tier Tribunal, where the Tribunal said that the argument that a witness needs to be physically present had a “realistic prospect of success”. However, the Tribunal did not decide the point.
When considering video witnessing, therefore, parties will need to balance the significance of the contract against the risk that it may be executed invalidly and, therefore, potentially unenforceable.
We advise against video witnessing, as there is a substantial risk that it is not effective.
However, in some cases, particularly where documents are signed electronically, there are other ways validly to execute a document. This might include finding a neighbour to witness through a window or (if the party is a company) having two directors sign. It therefore pays to explore all avenues open to a party when signing a document. For more information, see our blog on witnessing during Covid-19.
The Financial Reporting Council (FRC) has and the Department for Business, Energy and Industrial Strategy have produced a joint updated Q&A document on company filings, AGMs and other general meetings during the Covid-19 pandemic.
The key points arising out of the Q&A document are as follows:
- The Government remains committed to new legislation to give companies greater flexibility when calling AGMs and other general meetings. (For more information on the Government’s proposed measures, see our previous Corporate Law Update.) If passed, it is intended that the legislation will have retrospective effect from 26 March 2020.
- However, the Government cannot guarantee that the legislation will pass, and so companies that intend to hold a general meeting before any legislation comes into effect will need to take their own view on how to proceed.
- The Government’s intention is that the new legislation will allow companies, on a temporary basis, to override certain requirements in their constitution relating to the “mode” of their general meetings. Companies will need to decide for themselves whether to make similar changes to their constitution in the longer term.
- The new flexibility will be made available for the period within which the majority of companies plan to hold their AGMs. This may well be a shorter period than the duration of the current lockdown and social distancing restrictions.
- Companies that have postponed their AGM since 26 March 2020 will be given until the end of September to hold it. The Government intends to be able to extend this for a “further limited period beyond September”, if that appears appropriate and necessary.
- The lack of a physical meeting means shareholders will necessarily have a diminished ability to engage with and challenge management. The Government expects companies to consider this and make reasonable efforts to provide the usual degree of engagement and challenge. The Q&A suggests video calls, conference calls and email question facilities as ways to achieve this.
- It appears that the legislation will not automatically extend any AGM authorities obtained by a company at its last AGM, such as to allot and buy back shares and dis-apply pre-emption rights. The Government is encouraging companies to consider their specific requirements on a case-by-case basis.
The Financial Reporting Council (FRC) has updated its guidance note on corporate governance and reporting in the context of the on-going Covid-19 pandemic.
The guidance now includes a new section on interim reports, which will be of interest principally to publicly traded companies that choose or are required to issue quarterly or half-yearly financials.
The key points arising from the new section are as follows:
- Directors should exercise judgment over the procedures they apply to assess the going concern assumption at half- This might include disclosing material uncertainties to going concern, assumptions made about the future path of Covid-19, the projected impact on business activities, the use of government support measures, and access to bank and other financing.
- Directors may need to re-examine the going concern assumption and liquidity risk disclosures in some cases. These include where there is a significant adverse variation in operating cash flows, a significant reduction in projected revenues for the second half of the year based on plausible Covid-19 scenarios, a failure to renew or extend committed financing facilities, or a failure to sell capital assets for their expected amounts or within previously forecast time.
- If going concern becomes a significant issue since the previous annual accounts, directors should undertake procedures similar to those they would have carried out for annual accounts to ensure all relevant issues are identified and considered.
- The company should decide whether to engage its auditor to perform an interim review engagement. This is not required, but the FRC states it has received feedback from investors indicating that a review by the auditor provides valuable assurance.
Also this week…
- FRC updates strategic report guidance. The Financial Reporting Council (FRC) has made amendments to its Guidance on the Strategic Report. The amendments correct errors in two appendices that set out which companies are required to include certain information in their strategic report (including a section 172(1) statement) and their directors’ report.
- FRC publishes guidance on AQIs. The Financial Reporting Council (FRC) has published a review by its Audit Quality Review team of audit quality indicators (AQIs). AQIs are measures used to determine the quality of audit produced by a particular firm. The purpose of the review is to promote “continuous improvement in audit quality”. It contains various recommendations for audit committees, including to use AQIs when appointing the auditor and to review the various audit firms’ publicly available transparency reports and provide constructive feedback.
- ESMA consults on SME growth markets regime. The European Securities and Markets Authority (ESMA) is consulting on the effectiveness of the EU SME growth markets regime. It is seeking views on the criteria for a market to qualify as an “SME growth market”, on harmonising standards for applicants to SME growth markets, and on creating a “micro-SME” regime. It has also proposed a format for insider lists of SME growth market issuers under the Market Abuse Regulation. ESMA has requested responses by 15 July 2020. There are currently two UK exchanges designated as EU growth markets: AIM and the AQSE Growth Market.