Corporate Law Update

• The Government sets out its next steps in the reform of stamp taxes on shares
• The Government is consulting on changes to the UK’s merger control regime
• The FCA publishes final rules for special purpose acquisition companies (SPACs) seeking a UK listing
• A non-compete covenant in an NDA was enforceable after all
• The FRC publishes a report on board effectiveness and diversity in FTSE 350 companies
• The Treasury is consulting on new client due diligence requirements when setting up a limited partnership

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Government sets out next steps for stamp taxes on shares

HM Revenue & Customs (HMRC) has published a response to its recent call for evidence on reforming stamp duty and stamp duty reserve tax (SDRT), the two principal charges that apply to transfers of shares in companies and certain other securities.

For more information on that call for evidence, as well as an explanation of stamp duty and SDRT, see our previous Corporate Law Update.

HMRC notes that a majority of the organisations that responded to the call for evidence favour a single tax on the transfer of shares that applies to both listed and unlisted securities. Respondents also favour a move away from traditional stamping methods towards a tax that is digital and self-assessed, with same-day processing or the issue of a unique transaction reference number (UTRN).

In general, there was broad support for continuing with the existing SDRT regime and bringing the stamp duty regime into line with SDRT. This would involve incorporating some of the commonly used reliefs that apply to stamp duty but not SDRT (such as intra-group relief and reconstruction relief) into the SDRT regime. There was also support for making payment of stamp duty compulsory, as it currently is for SDRT.

There was also support for removing the requirement to pay stamp duty before a company’s register of members can be updated. Popular alternative options included providing a UTRN to the company instead or removing any requirement for a company to see evidence that stamp duty has been paid.

Respondents also generally favoured complete “dematerialisation” of shares, removing the need for paper share certificates and transfer forms, or perhaps dispensing with certificates and transfer forms altogether. In our view, this does seem inevitable, but it is worth noting that this would require significant changes to the UK’s company law framework and so may not happen in the short term.

Interestingly, there was mixed support for using distributed ledger technology (DLT) as a means of evidencing share ownership. Whilst some respondents saw DLT as particularly suited to holding share ownership information, others were concerned about cost, connectivity, accessibility and security.

Finally, there was “very strong support” for retaining the existing temporary measures for paying stamp duty that HMRC put in place to deal with the on-going Covid-19 pandemic, which allow taxpayers to submit documents for stamping electronically. HMRC confirmed in May this year that these temporary measures have now been made permanent.

Some respondents favoured abolishing stamp duty and SDRT altogether, but this was not within the scope of the call for evidence and so HMRC cannot consider these suggestions.

HMRC says that its next steps will be to:

• explore the feasibility and implications associated with key priority areas, including a single self-assessed tax on shares; and
• set up a working group to work collaboratively with stakeholders.

HMRC has invited stakeholders who are interested in participating in the working group to provide their details by 10 September 2021.

Government consults on reforms to UK’s merger control regime

The Government has published a consultation on proposed reforms to competition and consumer policy. The stated purpose of the reforms is to drive growth and deliver a competitive market that works for consumers.

Most of the reforms relate to domestic competition law, consumer rights and enforcing consumer law. However, the consultation sets out some proposals for reforms to the UK’s merger control regime.

Under the regime, the Competition and Markets Authority (CMA), the UK’s merger control watchdog, can investigate a merger (a “phase 2 assessment”) and take action if one or both of two “jurisdictional tests” are met:

• The “turnover test”. This applies where the UK turnover of the business being acquired is more than £70m.
• The “share of supply test”. This applies where the merger would create or enhance a share of at least 25% of the supply of particular goods or services in the UK or a substantial part of it.

As it currently stands, the regime is voluntary. Parties to a merger do not need to notify a merger to the CMA, although they may choose to do so to avoid the risk of the CMA later calling the merger in and unwinding it or imposing conditions, such as a divestment of assets.

The regime is also non-suspensory, meaning that parties to a merger do not need to pause the transaction or any post-completion integration pending a decision by the CMA.

Importantly, the Government is not looking to change either of these aspects of the UK’s merger control regime. It is, however, examining ways in which to improve the regime, given its voluntary and non-suspensory nature, by amending the jurisdictional tests. The proposals are set out below.

• Raising the “turnover test” threshold. The Government proposes to raise the threshold for the “turnover test” from £70m to £100m. This is principally designed to adjust the threshold for inflation.
• New “combined test”. The paper notes that there may be some mergers that fall outside the two existing tests but nonetheless are potential harmful to the UK’s markets. To deal with these, the paper proposes a new, two-limb test which would be satisfied if any business which is a merging enterprise has both:
  • a share of supply of at least 25% of a particular category of goods or services supplied or acquired in the UK or a substantial part of the UK; and
  • a UK turnover of more than £100m.

In effect, this is saying that a merger falls within the regime if either of the two existing tests applies to the target business, or both tests apply to any of the individual parties. This has the potential to expand significantly the number of mergers within the regime.

• De minimis exemption. At the same time, the Government is proposing to introduce a new exemption where the worldwide turnover of each merging party is less than £10m. If the exemption applies, a merger would fall completely outside the CMA’s jurisdiction and would not be subject to merger control, even if the share of supply or the proposed new combined test is met.
• Jurisdictional tests generally. The Government is inviting views on any other changes that could be made to improve the tests for deciding whether a merger falls within the regime.

The Government is also seeking views on proposed reforms to simplify and speed up the merger control assessment procedure. This includes allowing parties to a merger to request an automatic reference to a Phase 2 investigation without having to go through and wait on the result of a Phase 1 investigation. This would apply where the merger falls clearly within the CMA’s jurisdiction.

The Government has asked for responses to its proposals by 1 October 2021.

FCA publishes final rules for SPACs

The Financial Conduct Authority (FCA) has published final rules to revise investor protection measures for special purpose acquisition companies (SPACs) looking to list in the UK.

The FCA consulted on the proposed measures in March 2021. (For more information, see our previous Corporate Law Update.) It notes that feedback to the proposed measures was positive but, in light of certain responses, it has decided to revise some of its proposals.

By way of background, when a UK-listed SPAC identifies a potential acquisition, there is a presumption that its securities will be suspended pending the acquisition (although the FCA can decide not to suspend). This is designed to protect investors from disorderly markets arising out of the unavailability of complete information on the proposed acquisition. However, it also means that investors are unable to buy or sell shares in the SPAC, and so realise their investment, for a period of time.

The FCA believes that this represents a disproportionate barrier to listing for larger SPACs that build specific investor protections into their structures. It therefore proposed, in its consultation, to introduce new investor protections for investors in SPACs. SPACs that apply these investor protections would not see their securities suspended on identifying an acquisition opportunity.

Under the final rules, which come into effect from 10 August 2021, a SPAC’s securities will not be suspended automatically if the SPAC meets the following criteria.

• Size. The SPAC must raise at least £100m gross cash proceeds from public shareholders at the date of listing. (This has been lowered from £200m in the consultation.) “Public shareholders” does not include directors, founders or anyone promoting the SPAC, and funds provided by sponsors do not count towards the threshold.
• Ring-fencing. Proceeds raised by the SPAC must be ring-fenced via an independent third party. Funds must be released only to fund an acquisition, redeem shares in the SPAC or return capital to the SPAC’s public shareholders if the SPAC fails to make an acquisition.
• Time limit. The SPAC’s constitution must impose a time limit of two years from listing to make an acquisition and the SPAC must advertise this time limit in its prospectus. This can be extended to three years with the approval of the SPAC’s public shareholders and (in a change from the consultation) by an additional six months without shareholder approval if required to obtain shareholder approval or implement the transactions after obtaining shareholder approval. If no acquisition is made within the time limit, the SPAC’s funds must be returned to shareholders.
• Board approval of acquisition. The SPAC’s board must approve any proposed acquisition by the SPAC. For these purposes, any director of the proposed target, or anyone with an interest in the proposed target, is excluded from voting.
• Shareholder approval of acquisition. The SPAC must provide its shareholders with the right to vote on a proposed acquisition. For these purposes, the SPAC’s sponsors must be excluded from voting. The SPAC must disclose to shareholders sufficient information on the proposed transaction for them to make a properly informed decision when voting.
• “Fair and reasonable statement”. If any of the SPAC’s directors has a conflict of interest in relation to the target of the proposed acquisition, the SPAC must publish a statement in advance of the shareholder vote that the proposed transaction is fair and reasonable as far as the public shareholders of the company are concerned.
• Redemption option. The SPAC’s shareholders must be offered the option to redeem their shares at a pre-determined price as a means of exiting their shareholding if they do not like the target or final terms of a proposed acquisition. The terms of the redemption option must be detailed in the SPAC’s prospectus.
• Disclosure. When announcing a proposed acquisition, the SPAC must disclose details of the target’s business, links to all relevant publicly available information on the target, any material terms of the proposed transaction (including any expected dilution of public shareholders) and the proposed timeline for negotiations. It must also disclose how it has assessed and valued the target, as well as any other material details and information which investors need to make an informed decision. Finally, it must keep this information up to date.

Finally, the FCA has said that it will work with issuers and their advisers to provide comfort, as part of vetting the prospectus and assessing eligibility for listing, that a SPAC meets the conditions set out above. The FCA would not revisit this assessment at the point of the listing announcement, provided that the SPAC confirms the conditions remain met.

Non-compete in NDA was enforceable

The Supreme Court has overturned a decision of the Court of Appeal and found that a non-compete restriction in a non-disclosure agreement (NDA) (or confidentiality agreement) was enforceable.

What happened?

Harcus Sinclair LLP v Your Lawyers Ltd [2021] UKSC 32 involved two law firms that agreed to collaborate together on a piece of group litigation.

Your Lawyers (YL) (a relatively small firm) had been representing a group of thousands of claimants in a group action. Their funding broker suggested they collaborate with a more experienced firm and introduced them to Harcus Sinclair (HS).

The two firms signed an NDA so that YL could provide HS with information on the group action. HS agreed in the NDA to keep that information confidential.

The NDA also stated that HS would not act for any other group of claimants on the same group action for a period six years from the date of the NDA, unless it first obtained YL’s consent. However, HS was subsequently instructed by its own claimants. It issued litigation on their behalf and, a few months later, transferred that litigation to an associate company staffed by its own secondees.

In response, YL sought an injunction to stop HS from breaching the non-compete covenant.

The High Court initially found that the non-compete restriction was valid and enforceable, and that HS had breached it. However, the Court of Appeal overturned that decision and said that the non-compete was unreasonable and, therefore, unenforceable.

What did the Court of Appeal say?

In deciding whether the non-compete was reasonable, the Court of Appeal said it was necessary to examine why the parties entered into the NDA and what protections that agreement contained. It found that the purpose of the NDA was to allow YL to disclose confidential information to HS so as to obtain legal advice from HS, with the comfort that HS would keep that information confidential. It was not, however, a “collaboration agreement” regulating how YL and HS would co-operate on group litigation.

As a result, YL’s interest under the NDA was to protect the confidential information, not to prevent competition with its business. The non-compete was not necessary to preserve confidentiality. It protected a different interest of YL that was not covered by the NDA. It was also “out of proportion” to the benefit secured to HS under the NDA, namely the ability to obtain confidential information.

The Court of Appeal also found that the non-compete ran against the public interest, because it would have significantly limited the choice of firms that members of the public could use.

YL appealed to the Supreme Court.

What did the Supreme Court say?

The Supreme Court overturned the Court of Appeal’s decision and restored the High Court’s decision. The upshot was that the non-compete covenant was indeed enforceable.

A central question was whether the court was allowed to take into account any intentions of the parties that were not set out in the NDA. The Court of Appeal had focussed almost entirely on the purpose of the NDA without considering the parties’ wider (non-contractual) intentions. It was perfectly valid to take those intentions into account when deciding whether the non-compete was reasonable.

The Supreme Court concluded that there had been an “informal collaboration” between YL and HS, which the non-compete had been designed to protect and which benefitted HS in the longer run. The six-year period of the covenant was logical, because it roughly corresponded to the limitation period for bringing claims in the group action, and the covenant itself related only to the particular group litigation in question, not all legal advice.

Finally, the non-compete did not run contrary to the public interest. There was no public policy against a solicitor not acting for a client, not least because a solicitor is entitled to refuse to act for a particular person, and the non-compete did not significantly affect the public’s choice of solicitor in the litigation.

The non-compete covenant was therefore reasonable and enforceable.

What does this mean for me?

The Supreme Court’s decision shows that the courts will look at the wider factual matrix when identifying the purpose of a restrictive covenant and whether it is reasonable. The judgment is a useful reminder of points to consider when drafting or negotiating a non-compete restriction in a commercial contract.

• The non-compete must protect a legitimate interest of the party in whose favour it is given. This does not need to derive from the agreement containing the restriction. It could be set out in some other agreement or, indeed, not documented formally at all.
• In deciding whether a non-compete is reasonable, parties must consider their position at the time they enter into the contract. The fact that their relationship later develops into one that warrants a non-compete is irrelevant if the covenant was unreasonable when the agreement was signed.
• The parties should also consider whether the non-compete might have an impact on the public at large. (In many cases, this is now dealt with specifically by competition legislation, which prohibits (for example) anti-competitive agreements and cartel arrangements.)

Also this week…

• FRC publishes report on board effectiveness and diversity. The Financial Reporting Council (FRC) has published a joint report on board effectiveness and diversity in FTSE 350 companies. The report was been published jointly with the London Business School Leadership Initiative and economic and social development analyst SQW. The report was commissioned to address how board effectiveness and dynamics have been impacted by the increased gender and ethnic diversity of board membership, the attributes, skills and experience board members expect in diverse boardrooms of the future, and how to help nomination committees to take a more diversity-friendly approach to board recruitment.
• Treasury consults on AML requirements for limited partnerships. HM Treasury is consulting on changes to the UK’s money laundering regulations. Among other things, the consultation would expand the requirement for a trust or company service provider (TCSP) to conduct client due diligence checks to relationships where the TCSP is establishing a limited partnership. The regime currently applies only where a TCSP is establishing a legal person, but English limited partnerships are not legal persons.