Corporate Law Update

In this week’s update: proposed amendments to the National Security and Investment Bill, a parliamentary briefing on the NS&I Bill, further environment-conscious drafting, the Government publishes its next steps for reforming the UK listing regime, new QCA guidance on ESG for small and mid-sized quoted companies, a scheme circular did not omit material information or invalidate the scheme vote, Companies House resumes some same day services, AFME publishes a report on European ESG disclosures and some non-technical changes to the Takeover Code.

Proposed amendments to the National Security and Investment Bill are published
The Law Society publishes a parliamentary briefing on the National Security and Investment Bill
Further environment-conscious model drafting is published
The Government sets out its intended next steps for reforming the UK’s listing regime
The Quoted Companies Alliance publishes new ESG guidance for small and mid-sized quoted companies
A scheme circular on a takeover did not omit material information or invalidate the scheme vote
Companies House resumes same-day applications for incorporations and name changes
AFME publishes a report on the European ESG disclosure landscape
The Takeover Code is amended to adopt gender-neutral drafting

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.

Lords to consider amendments to National Security and Investment Bill

The House of Lords is to consider amendments that have been submitted to the National Security and Investment Bill, which is currently making its way through its final stages in Parliament.

The list of marshalled amendments can be found here, along with the Lords who have submitted them. Although it is unlikely that all amendments will be adopted, some of the more substantive amendments which may or are likely to be adopted are worth noting.

Mandatory notification thresholds. Under an amendment introduced by a Government minister, the threshold of 15%, above which parties operating in a “sensitive sector” are obliged to notify a proposed acquisition, would be removed. If adopted, this amendment would bring the mandatory notification thresholds into line with the voluntary notification thresholds. (There would, however, still be some differences in the types of trigger under the two regimes, depending on which other amendments are adopted.)
Time limit for responding to mandatory notifications. Under two proposed amendments, the Government would be required to respond to a mandatory notification within five working days. As drafted, the Bill currently requires the Government to respond “as soon as practicable”, which has prompted concerns that parties may not be able to predict the likely timetable for clearance.
Time limit for responding to voluntary notifications. As drafted, the Bill currently states that, if the Government accepts a voluntary notification, it has a period of 30 working days to respond to it. A proposed amendment would clarify that this review period begins from the date on which the Government receives the notification, rather than from the date on which it confirms that it has accepted the notification. This would provide certainty to the timetable as well as shorten the deadline for clearance and take control of the timetable out of the Government’s hands.

Law Society publishes briefing on National Security and Investment Bill

The Law Society of England and Wales has published a parliamentary briefing on the National Security and Investment Bill, which is currently making its way through the House of Lords. The briefing is prompted by the proposed amendments to the Bill that have been tabled (see above).

The Society continues to support the Bill overall but notes certain areas of concern.

Definition of “national security”. The Society recommends that the term “national security” be defined in the Bill to clarify that the concept is distinct from that of the “national interest”. In particular, the Society recommends that the Bill makes it clear that certain specific factors cannot be taken into account when considering “national security”.
Time limit for call-in. The Society recommends that the outside deadline for the Government to call a transaction in be reduced from five years from the date of the relevant trigger event to two years. It notes that transactions may be difficult to “void” or unwind after five years.
Overseas entities. The paper suggests that overseas entities should be within the scope of the regime only if they carry on activities in the UK, and not merely where they supply goods or services to persons in the UK. It also asks for guidance on the meaning of “carrying on activity in the UK”.
Intangible assets. The Society recommends narrowing the scope of intangible assets that are covered by the regime. It is concerned that, as currently drafted, the Bill would capture innocuous “UK-to-UK transactions”, which would be unusual compared with other national security regimes.
Group reorganisations. The paper recommends including exceptions for a situation where an investment is transferred by one company in a group to another company in that same group.
Mandatory notifications. The Society notes that the regime as proposed, under which a notification acquisition is automatically void if it is not approved, raises legal uncertainty for third parties and constitutional concerns for target entities. It recommends replacing this regime with one under which a transaction is voidable only by order of the Government.
Government response to notifications. The paper supports proposed amendments to impose a deadline of five working days for the Government to respond to a mandatory notification. It also recommends imposing a time limit on the Government to respond to a voluntary notification. Finally, it recommends making it clearer that, if the Government decides not to call a transaction in, it will not subsequently be able to change its mind and do so.
Public takeovers. The Society recommends that takeovers of listed companies should not be voidable under the regime. It notes that public takeovers of this kind would be conducted in the public domain and so the Government would be aware of them at an early stage.

Further environment-conscious drafting published

The Chancery Lane Project has published a further 21 clauses for its Climate Contract Playbook.

The Project is a pro bono collaboration involving lawyers working at various UK firms to develop new contracts that recognise climate concerns. Macfarlanes is proud to participate in the Project.

The Playbook provides environmentally aware drafting for businesses, communities and legal advisers. It now contains 71 template clauses for different types of legal document. Each clause bears a child’s name as a reminder of the importance of the climate to future generations.

The model clauses are free to use. They are untailored, so businesses and legal advisers should exercise judgment when deciding how and when to use them.

New clauses added to the Project’s bank of model clauses include the following.

Evan’s protocols. Protocols which parties to a transaction can adopt at the outset in order to minimise the carbon footprint of deal execution.
Felix’s clause. A net zero and carbon budget adjustment clause to be included within a completion accounts mechanism on a sale in order to provide “carbon certainty”.
Ming’s clause. A target carbon footprint budget (which reduces over time) for individual products manufactured and supplied under a contract.
Izzy’s clause. A mechanism to benchmark a contractor’s carbon footprint against the market.
Caesar’s clause. A requirement for contracting carriers to use energy-efficient vehicles for any road carriage under a contract or for a percentage of road journeys to use green HGVs.
Luke’s clause. A mechanism that sets targets for a supplier to reduce its carbon footprint and creates incentives to reward the supplier for meeting those targets.
Nico’s clause. A series of modifications to standard boilerplate drafting to embed climate change and net-zero concepts into an entire contract.
Scarlett’s performance conditions. Sample performance conditions that provide for part of a share-based incentive award to vest on meeting ESG targets (specifically climate targets).
Clara’s guide and checklist. Materials to introduce borrowers to, and encourage them to access, sustainability-linked loans (SLLs).
Matthew’s clause. Creative interest rate remedies by which payments are made either to a “green” cause or an off-setter.
Leo and Molly’s clause. A clause requiring that the governing law of a contract be interpreted in a manner consistent with the objectives of the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement.

Government sets out proposals for UK listing reforms

The Chancellor of the Exchequer has given a statement setting out the Government’s proposed reforms to the UK’s listing regime.

The statement follows the recent call for evidence on the regime, led by Lord Hill of Oareford CBE. The Treasury published the recommendations following from the Hill Review in March this year. See our previous Corporate Law Update for more information.

The Chancellor has confirmed that the Government intends to proceed as follows:

The Government will follow the Hill Review’s recommendation that the Chancellor present an annual “State of the City” report to Parliament. The first report will be in 2022.
The Treasury will consider the Hill Review’s recommendation of including a new “growth” or “competitiveness” objective for the Financial Conduct Authority (FCA) as part of its broader consultation on the UK’s future regulatory framework.
The Government intends to publish a consultation on the UK’s prospectus regime later in 2021, following the Hill Review’s recommendation to this effect. The consultation will also address two other recommendations from the Review, namely to consider whether prospectuses drawn up in other jurisdictions should be used to facilitate secondary listings in the UK and to make it easier to include forward-looking information by issuers in prospectuses.
The Chancellor will convene a group to consider improving the efficiency of further capital raisings by listed companies. The Treasury will consider the form this group should take.
The Department for Business, Energy and Industrial Strategy (BEIS) will take forward the Hill Review’s recommendation of considering how technology can be used to improve retail investor involvement in corporate actions and stewardship. It will do so as part of its response to the Law Commission’s recent scoping study on intermediated securities. BEIS expects to announce a response to that study later in 2021.

Seven of the recommendations in the Hill Review were directed towards the FCA. The Chancellor has confirmed that the FCA intends to consider those recommendations carefully.

QCA publishes ESG guidance for small and mid-sized companies

The Quoted Companies Alliance (QCA) has published a new practical guide for small and mid-sized quoted companies on how to approach environmental, social and governance (ESG) issues.

The guide is available for free in electronic form to members of the QCA or for a fee of £85 + VAT for non-members.

The main purposes of the guide are to help companies develop how they examine and disclose their approach to those ESG issues that matter for them, adopting an approach that is proportionate to the resource constraints of smaller companies, whilst giving investors and stakeholders the ESG information that they need in a digestible manner.

The guide is designed to be non-prescriptive and to complement the QCA’s separate Corporate Governance Code, which is adopted by the majority of companies on the UK’s growth markets. It sets out five steps which companies can take to develop further their approach to ESG. These include developing a clear purpose statement and undertaking an ESG materiality assessment.

Scheme circular on takeover did not omit material information

The High Court has held that a circular published by a target company in connection with a takeover implemented by scheme of arrangement was not misleading and did not invalidate the scheme vote.

What happened?

In the matter of William Hill plc [2021] EWHC 967 (Ch) concerned the proposed takeover of well-known British betting shop and online gaming business William Hill by Caesars Entertainment.

As is common, the takeover was structured as a court-sanctioned statutory scheme of arrangement, under which William Hill’s shareholders would approve the transfer of their shares to Caesars in exchange for the payment to them of the cash purchase price.

To be effective, a scheme must be approved by a majority in number of each class of the company’s shareholders who, together, hold at least 75% of the value of that class. If it is so approved, it must then be sanctioned by the court. The court will examine the vote to ensure it reflects shareholders’ views but will be reluctant to refuse sanction for a scheme that has been approved by shareholders.

As part of a takeover by way of a scheme, the target company must send a scheme circular – in technical terms, an “explanatory statement” – to its shareholders. The purpose of the circular is to explain the proposed takeover and the scheme and to seek shareholder approval.

The explanatory statement must explain the effect of the proposed scheme. It must contain all information that is reasonably necessary to enable shareholders to make an informed decision as to whether the scheme is in their interests. This includes a statement of all the main facts that will enable shareholders to exercise their judgment on the proposed scheme.

In this case, the scheme circular disclosed the existence of a joint venture (JV) in the United States between William Hill and Caesars. Under the terms of that arrangement, Caesars had the right to terminate the JV if a so-called “Restricted Acquirer” obtained control of William Hill. Caesars was entitled to name up to six Restricted Acquirers and to change the identity of any of those Restricted Acquirers every six months. William Hill had a similar right to terminate if someone were to acquire control of Caesars.

The scheme circular published by William Hill summarised Caesars’ termination right as follows:

Caesars has the right to periodically add to or substitute names to a limited list of "Restricted Acquirers" of [William Hill] ([William Hill] having a reciprocal right in relation to Caesars) whereby inclusion on this list would give Caesars the right to terminate the US joint venture agreement should [William Hill] be acquired by one of these Restricted Acquirers.

In the event, the scheme was approved by 81.3% of the shareholders entitled to vote, who between them held 86.34% of William Hill’s share capital.

One organisation, which held only a small shareholding in William Hill but derivative interests relating to a greater number of its shares, objected to the circular, arguing that the summary above did not accurately reflect the terms of the JV. In particular, it said that the summary made it appear that Caesars had an unfettered right at any time to add any competing bidder to its restricted list, effectively giving it a veto over any competing offers for William Hill. In reality, however, Caesars could not update the list more frequently than every six months and so might not be able to block a competing bid.

This, the shareholder argued, meant that the shareholders voting on the scheme did not have all information reasonably necessary to make an informed decision. Had they known the more granular terms of the termination right, they may have held out for a better offer. As a result, it said that the outcome of the vote was unreliable and should be disregarded.

What did the court say?

The court disagreed. The judge said the information included in the scheme circular had been absolutely adequate for the purpose of informing shareholders. He also held that the vote on the scheme had not been tainted and that the takeover should proceed.

In giving his judgment, the judge cited the following reasons:

It was correct to disclose the existence of the JV termination right. An ordinary shareholder would be aggrieved if they rejected Caesars’ offer in the hope of a better one from a competing bidder, only to discover that the JV arrangements effectively precluded any better offers from emerging.
However, although it may be material to disclose the existence of a termination right relating to a key business relationship, that does not mean that it is necessary to disclose the precise terms. The relevance of precise terms will vary with the circumstances of each shareholder. The judge did not think that William Hill’s shareholders as a whole would have regarded the precise terms of the JV termination rights as significant.
It is “easy to say” that more information should have been provided on a given matter. The court must be careful that allegations are not deployed to frustrate the wish of the majority and turn the sanction process into “a game” enabling those who buy into a bid to maximise their return. The court will examine whether an alleged deficiency caused mistaken votes to be cast.
The objection had been raised principally by persons holding derivative interests in William Hill’s shares, not shareholders. In substance, no shareholder at the time of the vote had aligned themselves with the objection or claimed to have voted under a material misapprehension. There was no evidence that the vote did not represent the views of the shareholders.
The objection was raised at the meeting convened to hold the vote, but no-one at the meeting thought it sufficiently significant to request an adjournment. Moreover, William Hill’s financial adviser did not regard it as significant enough to report to the Takeover Panel, and, when the issue was raised directly with the Panel, the Panel decided not to take any action.

What does this mean for me?

The court sanction hearing is an important part of approving a takeover implemented by way of a statutory scheme. It is not merely a formality. The court will examine aspects of the shareholder vote closely, including attendance levels, the information provided and whether shareholders voted in good faith in the interests of each class of shareholder.

This decision shows that the courts will be pragmatic and sensible when considering the right level of detail that needs to be included in the explanatory statement. The target company, which is responsible for the statement, is required to ensure it is as concise as possible yet contains all information that may reasonably be relevant to the shareholders’ decision on how to vote.

This represents a particularly delicate balancing act. Inevitably, it is impossible to include full details of all relevant arrangements in a relatively pithy circular, whether for reasons of confidentiality or because to do so would turn the circular into a lengthy and undigestible document.

Here, the court concluded that the wording of William Hill’s circular was appropriate and did not cause shareholders to be misled or to lack material information.

It is important, however, to assess every takeover in its own context. A target company in a similar position should ask itself the following.

Does the circular contain all information reasonably necessary to enable scheme shareholders to make an informed decision on the scheme?
Put another way, is the company aware of anything that is not known to shareholders but which, if known about, might influence the way they vote?
In the context of a takeover, is there any information that might cause shareholders to reassess whether to approve the takeover and instead to hold out for a better offer?
Is the information in the circular full and accurate? This does not mean that every detail needs to be included, but the information must not be misleading by omission.

Also this week…

Companies House resumes limited same-day services. Companies House has resumed certain same-day services with effect from Thursday, 22 April 2021. For a premium fee, limited company incorporations can be fast tracked via software, and both limited company and LLP name change registrations can be fast tracked via software or Webfiling. Applications must be submitted by 11:00 a.m. to be processed on the same day. Applications received after that time will not be processed until the next working day. Companies House is not currently offering same-day services for any other filings until further notice.
AFME publishes report on European ESG disclosure landscape. The Association for Financial Markets in Europe has published a report on the landscape for environmental, social and governance disclosures for banks and capital markets in Europe. The report aims to provide a detailed inventory of the key elements of the European regulatory landscape for ESG disclosures and the voluntary TCFD Framework and to provide a practical, easy-to-read summary of how financial institutions can navigate those requirements.
Takeover Code amended to become gender-neutral. The Takeover Panel has published Instrument 2021/2, which makes various non-technical changes to the Takeover Code in order to replace gender-specific terms with gender-neutral terms. Changes including replacing “Chairman” with “Chair”. The changes take effect from 5 July 2021.