Corporate Law Update

• The court grants relief for unfair prejudice against a majority shareholder
• The Treasury consults on significant changes to overhaul the UK’s prospectus regime
• The Treasury consults on wholesale changes to the UK’s capital markets, including a new trading venue for smaller SMEs
• The FCA consults on changes to the listing regime, including to permit dual class share structures and reduce the “free float” requirement
• The FCA publishes proposed guidance for cannabis-related companies seeking a UK listing
• The Takeover Panel publishes updated Takeover Code and practice statements

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Court considers order for unfair prejudice against majority shareholder

The High Court considered the appropriate remedy for an unfair prejudice petition based on breaches of directors’ duties and failures to observe the terms of a shareholders’ agreement.

What happened?

Macom GmbH v Bozeat and others [2021] EWHC 1661 (Ch) concerned a company owned by a married couple and a German company. The corporate member was the majority shareholder and the married couple were minority shareholders.

The corporate member appointed a director to the company’s board. The company’s only other director was the husband. Under the terms of the company’s articles of association, any decision of the directors was to be made by a majority decision at a meeting of the board. However, the husband had a casting vote under a shareholders’ agreement, giving him control of the company’s board.

Relations between the two directors deteriorated following the late payment of a dividend. When the corporate member’s CEO intervened to resolve matters, relations broke down and the corporate member ceased supporting the company financially and operationally. In response, the husband restricted the corporate member’s access to information and refused to meet or correspond with the director appointed by the corporate member.

The corporate member claimed that this behaviour (among other things) amounted to unfair prejudice. Under English law, a member of a company can petition the court for relief if (among other things) the company’s affairs have been or are being conducted in a manner that is unfairly prejudicial to the interest of members generally or of some part of the members that includes that member.

Normally, if a court concludes that there has been unfair prejudice, it will order a buy-out of the aggrieved member’s shares. However, the court has wide discretionary powers to decide what relief to provide.

What did the court say?

The court agreed that the corporate member had been unfairly prejudiced.

The judge said that, even though the corporate member may not have suffered any financial loss, it had a right to be consulted and involved in the company’s management under the company’s articles and the shareholders’ agreement, which was part and parcel of its investment in the company. By excluding the corporate member, the company had unfairly prejudiced it.

The corporate member had argued that “it would be wrong in principle for the court to perpetuate a dysfunctional relationship” and requested an order that its shares be purchased. As noted above, this kind of buy-out is probably the most common type of relief granted to remedy unfair prejudice.

The judge acknowledged that, in deciding what relief to grant, the type of relief an aggrieved member is seeking is a major factor which the court should take into account. However, he felt it would be “wholly disproportionate” to order the husband to buy the corporate member’s shares when the corporate member had not shown that it had suffered any financial loss.

Rather, the judge noted that the unfair prejudice had related to the governance and management of the company. He therefore concluded that an order regulating the future conduct of the company’s affairs was a more appropriate remedy. Specifically, he made an order requiring the company’s members to comply with the relevant provisions of its articles and the shareholders’ agreement, and supplementing those provisions with some additional governance terms, such as a requirement to hold board meetings on a frequent basis.

How does this affect me?

This is a rare example of a majority shareholder suffering unfair prejudice, rather than (as is more common) a minority shareholder. It is also unusual because the relief granted was not a buy-out of shares, but rather an order as to the corporate governance of the company.

The case is a reminder that the court has a wide discretion when deciding what relief to grant in the face of unfair prejudice. It will consider the wishes of the member who is alleging prejudice but, as a general rule, will grant the relief that is most appropriate in the circumstances.

For a member alleging unfair prejudice, the decision highlights certain things to consider:

• What order should I seek? It is typical to ask the court for a buy-out order, but this may not always be the most appropriate remedy. The order a court will make depends to some extent on the nature of the behaviour that has allegedly given rise to unfair prejudice.
• What loss have I suffered? If the aggrieved member has not suffered any financial loss, it is less likely that the court will make an order that compensates the member economically.
• Am I in the minority? Normally, a member holding a majority of voting rights in a company will have the power to effect significant change, including by changing the company’s board, in order to address any issues. In that case, the court may be less willing to intervene. However, as this case shows, in some circumstances a majority member may have a good case.
• Is there any value in seeking an order? Ultimately, unfair prejudice proceedings are very evidence- and fact-driven. They can be long, drawn-out and costly. If the likelihood at the end of the matter is that the court will not make an order for a buy-out, an aggrieved member should weigh up carefully the merits and drawbacks of bringing a petition in the first place.

For company directors and shareholders, it is a reminder to consider carefully how the way in which a company’s business is run may impact its members. The fact that a member may have control of a company does not mean it can ignore another member’s rights.

Treasury consults on overhauling the UK prospectus regime

The Treasury has published a consultation on the future of the UK prospectus regime.

The consultation sits alongside the separate Wholesale Markets Review consultation published by the Treasury, which we cover below, and the consultation by the Financial Conduct Authority on the UK listing regime, which we also cover below.

Under UK law, in order to offer transferable securities to the public or to request admission of transferable securities to a UK “regulated market” (such as the LSE Main Market or the AQSE Main Market), unless an exemption applies, a prospectus must be published setting out information on the issuer and securities. The purpose is to ensure that investors have the information they need to make an informed choice.

The legal and regulatory regime is covered by a combination of the EU Prospectus Regulation (which continues to apply, in modified form, in the UK), Prospectus Regulation Rules made by the Financial Conduct Authority (FCA), and various pieces of guidance.

The purpose of the review is fourfold.

• To facilitate wider participation in the ownership of public companies and to remove disincentives to issuing securities to wide groups of investors, including retail investors.
• To simplify the regulation of prospectuses without lowering regulatory standards.
• To improve the quality of information investors receive under the prospectus regime.
• To ensure that the regulation of prospectuses is more agile and dynamic.

The consultation covers various areas, including prospectus content, the impact on “junior capital markets” (such as AIM and AQSE Growth), and how any revised regime would impact crowdfunding by companies that are not admitted to a securities exchange.

It proposes a revised framework with more responsibility delegated to the FCA. Basic provisions requiring a prospectus and establishing the “overall standard” of preparation would sit in statute, but exemptions and content requirements would appear in rules made by the FCA. This is similar to the regime that applied in the UK before the EU Prospectus Regulation came into force.

Key proposals arising out of the consultation that would affect equity securities include the following.

Admission to trading

• It would no longer be a criminal offence to request admission to trading on a regulated market without a prospectus. Rather, an application without a prospectus would simply be refused.
• The FCA would have power to make and change rules regulating admissions to regulated markets without the need for legislation. It would be able to decide whether and when a prospectus is required and to create and modify exemptions from time to time.
• The FCA would have power to decide whether securities could be admitted to a dual or secondary listing on a regulated market based on a non-UK prospectus. (Following Brexit, prospectuses approved within the EU are no longer automatically valid in the UK.)
• The seldom-used “simplified prospectus regime” for secondary issuances would likely be dropped, with prior admission simply being a relevant factor when deciding what information is included in a prospectus for a secondary issuance. The consultation implies that content requirements in these circumstances could be reduced significantly.
• There would no longer be a legal requirement for the FCA to review a prospectus before approving it. That is not to say that the pre-publication review process would disappear, but the FCA could dispense with it where it feels appropriate.

Public offers of securities

The requirement for a prospectus when offering transferable securities to the public would stay broadly similar. It would still be an offence to make an offer without an approved prospectus, and existing exemptions would remain. However, the Treasury is proposing some new exemptions.

• First, an issuer with shares already admitted to trading on a regulated market, or which is applying for admission to a regulated market, would not need to publish a prospectus to offer securities to the public. Instead, investor protection would be provided through FCA regulation.
• The consultation asks whether a similar approach should be adopted for junior markets (with protection provided through rules formulated by the exchange and vetted by the FCA).
• Secondly, offers to existing holders of an issuer’s securities would not be treated as offers to the public and so would not trigger the need for a prospectus. This would exempt all rights issues and share-for-share exchange offers from the need to publish a prospectus.
• Finally, the consultation explores ways to bring crowdfunding by “private companies” (that is, companies not traded on a securities exchange) outside of the prospectus regime completely by instead requiring a company to conduct any crowdfunding through an FCA-authorised firm.
• The consultation also seeks views on the existing exemptions for offers to 150 persons or fewer, to qualified investors and to employees.

Forward-looking information

• The consultation notes that issuers are less likely to include forward-looking information (FLI) in a prospectus than in other public documents. It suggests this might be because the threshold for liability is lower (and so the risk greater) for information in a prospectus than in other documents.
• A person who authorises the inclusion of untrue or misleading information in a prospectus is liable unless they believed the information was true and not misleading (the so-called “negligence standard”). For other documents, liability often arises only if the person knows that, or is reckless as to whether, information is untrue (the so-called “dishonesty standard”).
• The Treasury is therefore proposing to replace the negligence standard with the dishonesty standard for FLI in a prospectus. A similar approach would apply where FLI is simply omitted altogether from a prospectus. This change would apply only to FLI. It would not apply to statements or omissions of fact as at the date of the prospectus or to working capital statements.
• An issuer that includes FLI in its prospectus would have to identify explicitly the information as FLI and that a lower standard of liability attaches to that information.
• For junior markets, the Treasury has proposed a complex option that would see an admission document elevated to a quasi-prospectus status so that the same regime can be applied.

Non-UK issuers

• Finally, the consultation seeks views on ways to increase retail participation in offers within the UK by non-UK issuers. Currently, non-UK issuers can use a prospectus prepared under their local law, but it must be approved by the FCA first to extend the offer into the UK.
• One suggested option is for the Treasury to grant equivalence decisions for other jurisdictions, so that an issuer could use a prospectus approved in that jurisdiction to offer securities in the UK without FCA approval (although subject to a limited FCA veto). To preserve the competitiveness of the UK’s markets, this would not extend to offers forming part of an initial public offering (IPO).

The Treasury has requested responses by 24 September 2021.

Treasury consults on reforming the UK’s capital markets

The Treasury has published a consultation as part of its Wholesale Markets Review. The Review was established to decide how to adapt regulation of secondary markets in the UK following Brexit.

Many of the reforms proposed by the consultation relate primarily to the regulation of financial services by FCA-authorised firms and to markets in derivatives, debt securities and commodities. The review also makes proposals designed to open up funding through the equity capital markets for small and medium-sized enterprises (SMEs).

Insofar as it affects the equity capital markets, the key points from the consultation are set out below.

• The consultation notes that smaller SMEs often source financing through crowdfunding and private markets (including private equity sponsors) but are deterred from seeking capital through public markets due to the increased regulatory burden. It suggests that this occurs both at point of entry (e.g. due to the cost of producing offer documents) and on an on-going basis (e.g. due to costs associated with complying with the Market Abuse Regulation (MAR)).
• The Government is therefore exploring the possibility of creating a new class of trading venue for smaller SMEs. The paper suggests a threshold of £50m market capitalisation as a ballpark maximum issuer size for such a market. The new venue could take the form of an entirely new platform or an additional segment on an existing platform.
• The venue would be subject to more proportionate regulatory requirements tailored for smaller SMEs while preserving the high levels of investor protection. These would be similar to regulation that applies to multilateral trading facilities (MTFs), such as AIM and AQSE Growth. This would entail amendments to MAR, a new offer document regime (sitting outside the prospectus framework), and new eligibility criteria for smaller SMEs.
• In particular, such a new venue would be subject to reduced requirements around company disclosure so as to encourage more companies to come to market earlier than planned.
• The Government expects that demand for shares on the new venue would come from retail investors. It therefore wishes to explore how to uphold investor protection whilst keeping demands on issuers “proportionate and manageable”.

The Treasury has requested responses by 24 September 2021.

FCA consults on reforms to the listing regime

The Financial Conduct Authority (FCA) has published a new consultation (CP21/21) as part of its Primary Markets Effectiveness Review. The consultation proposes various changes to the UK’s listing regime to ensure that it remains competitive.

The proposals are designed to reduce barriers and costs for companies considering listing and encourage more companies to become or stay listed in the UK, whilst maintaining market transparency and integrity.

The key points affecting equity securities that arise out of the consultation are set out below.

Models for a revised listing regime

• The paper seeks views on four proposed “models”, although it emphasises that these are not discrete options, but rather ways to highlight existing features that could be modified. The models focus on three types of company – growth, established and overseas – but the main thrust is the extent to which the existing premium and standard listing segments should be harmonised.
• Model 1 represents a thought experiment in maximum deregulation. Under this model, all companies would be subject to the same minimum protections through the prospectus regime, market abuse regime and ongoing disclosure responsibilities. Existing elements of the premium listing regime, including the need for a track record and a sponsor, would be eliminated. Any additional investor protection would come through rules set by trading venues and indices.
• Model 2 takes the opposite approach and posits a system based on the existing highest standards of a premium listing. For example, all listed companies would require a sponsor, seek shareholder approval for certain matters and have all circulars approved by the FCA. Companies that do not wish to adhere to these standards could apply to an “unlisted” market. This model is effectively a proposal to abolish the standard listing segment.
• Model 3 proposes a “senior” segment much like the current premium listing, although additional flexibility could be introduced in some areas, such as on the requirement for a three-year track record. This would sit alongside an “alternative” segment, for which the FCA would set minimum standards but which would be regulated largely by the relevant trading venue. This would be aimed primarily at start-ups and highly acquisitive companies.
• Finally, Model 4 is a variant on Model 3, with minimum eligibility standards for the “alternative” segment being set calibrated by the market rather than prescribed by the FCA, which would have a pared back role approving prospectuses and setting ongoing disclosures. Issuers could agree features such as “free float” with investors, possibly entrenching them in their constitution, or they could be set by the trading venue or develop out of investor guidance.
• On a related note, the FCA is seeking views on the possibility of removing the need to apply for listings of further issues of a class of shares that is already listed. (An issuer would still need to apply for any shares under a further issuance to be admitted to trading.)

Dual class share structures

• The FCA is proposing a “targeted and time-limited form of dual class share structure (DCSS)” within the premium listing segment. DCSSs are currently incompatible with a premium listing because the Listing Rules permit only premium-listed shares to vote on matters connected with the listing, and they require an issuer to show that it can run an independent business.
• Under the FCA’s proposal, by way of an exception to the general rule, holders of unlisted weighted voting rights shares would be entitled to vote on matters relevant to an issuer’s premium listing.
• This exception would be temporary and would last for five years from the date of admission. It would be available only to issuers seeking admission to a premium listing for the first time. At the end of those five years, either the weighted voting rights would need to be deactivated, or the issuer would need to move to the standard segment or de-list.
• To qualify, the unlisted share class would need to meet certain conditions. These include a requirement that the shares have a maximum weighted voting ratio of 20:1, are held only by directors (or beneficiaries of a director’s estate) and convert automatically to ordinary shares if they are transferred to anyone else.
• The unlisted shares would be able to vote on all matters. However, weighted voting rights would apply only on certain resolutions, namely a vote to remove the holder as a director, or on any matter following a change of control of the issuer (so as to deter a takeover during the five-year period). On other matters, the shares would participate on a “one vote per share” basis.
• The FCA would not expect the weighted shares to be admitted to listing, and it is not proposing to change the requirement for the issuer to be able to run its business independently.
• The exemption would not be available to sovereign-controlled commercial companies or to closed-ended investment funds.
• It would remain possible to admit shares within a DCSS to the standard listing segment.

Minimum market capitalisation

• Currently, an issuer must have a minimum market capitalisation (MMC) (that is, an aggregate market value of all securities it is proposing to list) of at least £700,000. This applies to all kinds of issuer on both the premium and standard listing segments.
• The FCA now believes that having such small companies on the biggest markets may be leading to reduced liquidity and increased share price volatility. It believes that small companies are likely to benefit from the kind of support afforded by markets such as AIM and AQSE Growth.
• As a result, the FCA is proposing to raise the minimum market capitalisation from £700,000 to £50m. This change would apply only to new issuers. Existing issuers would be unaffected, although issuers (such as special purpose acquisition companies) which may need to reapply for listing following a reverse takeover may need to consider the proposed change carefully.

Free float requirement

• Currently, a company looking to list must demonstrate that at least 25% of its shares are “in public hands”. This is commonly known as the free float requirement. Shares are in public hands if they are not held by (among other people) a director or someone connected with them, a shareholder with director appointment rights, or someone who holds more than 5% of the issuer’s shares.
• The FCA is unable to identify a direct link between the level of the free float and liquidity in the market. However, the FCA does believe that the free float can be used to safeguard liquidity and that there should always be at least two “public” shareholders at any given time.
• As a result, the FCA is proposing to lower the current free float requirement from 25% to 10%. This means an issuer would necessarily always have to have at least two public shareholders. This would apply to both the premium and the standard listing segment.
• The FCA would no longer grant dispensations from the free float requirement.
• The paper also asks whether issuers should be required to make an annual declaration of their free float so that investors can evaluate their position on a regular basis.

Track record requirement

• A company seeking a premium listing must first demonstrate a three-year financial track record covering at least 75% of its business. Alternative provisions apply to specialist companies, such as mineral, scientific research and property companies.
• The FCA does not intend to remove this requirement but is considering expanding the categories of company that can provide alternative information in place of a three-year track record. It is asking for views on the types of company that struggle to meet the existing requirement and what alternatives could be considered.

The FCA intends to make final rules before the end of 2021 to give certainty for companies considering funding rounds in Q1 2022. It has asked for comments on the proposals by 14 September 2021.

FCA publishes guidance on listings by cannabis-related businesses

The Financial Conduct Authority (FCA) has published proposed new guidance on the circumstances in which it will approve listings by companies carrying on cannabis-related activities.

Primary Market Bulletin 35 announces the publication of a proposed new technical note (TN/104.1) setting out non-exhaustive guidance on which types of business the FCA would be prepared to admit to listing and which it would not. The key points arising out of the proposed note are set out below.

• The possession and supply of cannabis for recreational purposes are criminal offences in the UK. Proceeds from those activities, even from jurisdictions where those activities are legal, are proceeds of crime. Therefore, the FCA will not admit the securities of a recreational cannabis company to the Official List.
• The FCA is prepared to admit other companies that develop, produce and sell licensed and unlicensed cannabis-based medicinal products (CBMPs), licensed cannabis-based medicines and consumer products containing cannabidiol (CBD), provided the company has all appropriate Home Office licences and the entirety of its operations (including its supply chain) is UK-based.
• However, given the increased legal risks associated with cannabis-related businesses, these companies will be subject to greater due diligence by the FCA before listing. The scope and extent of due diligence will be determined on a case-by-case basis.
• UK-based cannabis-related companies will need to hold all appropriate Home Office licences and satisfy the FCA that the entirety of their operations (including its supply chain) is UK-based
• Overseas cannabis-related companies will need to satisfy the FCA that their business does not give rise to any money laundering offences in the UK. In particular, a company will need to show that its overseas activities are for a purpose that is lawful in the UK and to explain the local licensing laws that apply to those activities in the form of a legal opinion.
• The FCA advises these companies and their advisers to raise any questions of legal uncertainty surrounding the company’s operations with the FCA it at an early stage.

Also this week…

• Takeover Panel publishes updated Code and practice statements. Following changes to the Takeover Code that have now come into effect, the Takeover Panel has published an updated version of the Code, as well as updated versions of a number of its Practice Statements. These include (among others) Practice Statements No. 5 (invocation of conditions), No. 11 (working capital requirements), No. 28 (entering into talks during a restricted period), No. 29 (offer-related arrangements) and No. 31 (strategic reviews and formal sale processes).