Corporate Law Update

In this week’s update: a claim was validly served at a company’s former place of business, PERG’s annual report on compliance with the Walker Guidelines, a GC100 discussion paper on the future of AGMs, the QCA response to the Government’s review of the UK’s listing regime, ISS FAQs on executive pay during Covid-19, ESMA updates its Q&A on the EU Prospectus Regulation and publishes a list of languages in which EU Member States will accept prospectuses for approval and the European Parliament proposes the introduction of mandatory ESG diligence for market participants.

A claim was validly served on a company by serving it at its former place of business
PERG publishes its annual report on compliance with the Walker Guidelines
The GC100 publishes a discussion paper on the future format of AGMs
The Quoted Companies Alliances responds to the Government’s review of the UK’s listing regime
ISS publishes frequently asked questions on executive pay during the Covid-19 pandemic
ESMA publishes updated Q&A on the EU Prospectus Regulation
ESMA publishes a list of the languages in which EU Member States will accept prospectuses for approval
The European Parliament proposes to require EU market participants to address ESG compliance

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.

Claim was validly served on overseas company at old address

The High Court has held that a claim was validly served on an overseas company at its old place of business, because the record at Companies House had not been updated by the time the claim was served.

What happened?

Helice Leasing S.A.S. v PT Garuda Indonesia (Persero) TbK [2021] EWHC 99 (Comm) concerned a claim for rent under an aircraft lease. The defendant – PT Garuda – was a company incorporated in Indonesia which had previously been operating in the United Kingdom.

Under UK law, where a non-UK company (an “overseas company”) sets up a branch or a place of business in the UK, it must register (among other things) the address of the branch or place of business at Companies House. It must also file any changes to that address within 21 days of the change taking place.

Under rule 6.9 of the Civil Procedure Rules (CPR 6.9), where a claim is to be served in England or Wales on an overseas company, the default address for service on an overseas company is any place in England or Wales where the company carries on its activities, or any place of business of the company in England or Wales.

Helice issued its claim on 16 April 2020 and later amended it on 16 July 2020.

Before serving the amended claim on PT Garuda, Helice’s lawyers checked the record at Companies House to identify the address of PT Garuda’s place of business. Companies House showed PT Garuda’s place of business to be an address in Hammersmith, London, England, and so Helice’s lawyers served the claim at that address.

Unbeknownst to Helice, PT Garuda had in fact ceased to carry on business in the UK on 1 February 2020 and moved its branch to a new address in Hounslow, London, England on 1 July 2020. It filed notice of that change of address with Companies House on 2 July 2020. However, for some reason (presumably because of disruption caused by the ongoing Covid-19 pandemic), Companies House did not register the filing and update PT Garuda’s public record until 18 August 2020.

As a result, between 1 July 2020 and 18 August 2020, the record at Companies House showed PT Garuda’s old address as its place of business.

PT Garuda later argued that the claim had not been validly served, because it had not in fact been served at a place where PT Garuda was carrying on activities or business.

The question was: had Helice been entitled to rely on the record at Companies House when serving its claim on PT Garuda?

What did the court say?

The court said the claim had been validly served.

The judge said the key question was: who bears the risk during the period in which Companies House is updating its website with an overseas company’s new address: the public (in this case, Helice) or the company (in this case, PT Garuda)?

He found that the company bears the risk. He gave the following reasons:

It is the company which is seeking to change its address. In these circumstances, the company can see that its old address remains published on the Companies House website.
A company can and should take simple steps to deal with this. This includes ensuring any post is forwarded during the interim period and recording its change of address in any correspondence.
If the public were not able to rely on information published by Companies House, the information would be useless, as it might always be subject to an unpublished filing. This would undermine certainty and require litigants to investigate whether unpublished changes had been filed.
Similarly, PT Garuda’s argument would logically mean that a company could prove that it was not carrying on business at a particular address, even if it had given that address to Companies House as its place of business. Again, this would undermine the reliability of the public register.

Although it does not affect the decision above, there are a few factual elements in this case which will not have helped PT Garuda in its argument:

On ceasing its business on 1 February 2020, PT Garuda should have filed a change of details at Companies House. Had it done so within the 21 days allowed, its record could have been updated on or around 22 February 2020, well before the claim was initially issued, and the claim would never have been served at its old address.
Helice had also served its claim by email, which included a covering letter that expressly referred to the address published at Companies House. PT Garuda did not object to this until after the deadline for service had expired.
PT Garuda did in fact acknowledge service of the claim.

What does this mean for me?

The judgment highlights the risks for a company when changing its address in England or Wales.

For overseas companies doing business in England or Wales, the decision shows the critical importance of keeping the company’s filings at Companies House up to date. The public will be entitled to rely on the record at Companies House and use the company’s address published there to serve documents on it.

Although this decision related to an overseas company, the same principle should apply to legal entities incorporated within the UK. The general rule under CPR 6.9 is that a person can serve a claim on a UK company or limited liability partnership (LLP) at its “principal office” or any place of business in England or Wales that has a real connection with the claim. The registered office of a company or LLP given at Companies House will suffice for these purposes.

This has particularly significant implications at the moment: due to the ongoing Covid-19 pandemic and the stay-at-home orders (or lockdowns) in force in England and Wales, Companies House is operating with limited staff and filings are taking significantly longer to be registered.

When changing its place of business in England or Wales, a company or other legal entity should take certain steps:

Update the address at Companies House as soon as possible. Although an overseas company has 21 days to do this, it is better to act promptly to minimise any period during which claims can be served at its old address. For UK companies and LLPs, a change of registered office address is not effective until Companies House registers it, so, again, time is of the essence.
Set up a mail redirect. A company should ensure that, from the point of changing address, any post sent to its old address is automatically forwarded to its new address. This is straightforward where mail is sent through Royal Mail, but it may be more difficult where correspondence is sent through a courier or delivered by hand.
Employ someone to check for mail at the old address. As noted above, a mail redirect might not pick up all correspondence left at the company’s old place of business. A company should consider having an employee or agent visit the old address periodically (perhaps daily, if the company is involved in a legal dispute) to check for mail.
Publicise the change of address. While waiting for Companies House to update the public record, a company should advertise its change of address to customers, suppliers and other persons with whom it does business. For example, it could put a notice on its website and include an automated footer in its emails. In many cases, it will be helpful to send a specific email to customers and counterparties informing them of the change of address.

PERG publishes annual report on Walker Guidelines compliance and updated good practice guide

The Private Equity Reporting Group (PERG) has published its 13^th annual report on compliance with the Guidelines for Disclosure and Transparency in Private Equity (also known as the “Walker Guidelines”).

The Guidelines are designed to assist private equity firms and their portfolio companies with improving transparency in financial and narrative reporting. They require portfolio companies to make certain disclosures in their annual report, publish their report and a mid-year update in a timely manner, and share certain data to gauge the contribution of UK private equity to the economy.

They also require private equity firms to make certain website disclosures.

This year’s report covers 61 portfolio companies and 51 firms that backed them. Given the impact of the Covid-19 pandemic, all new portfolio companies were given a “first-year grace” in relation to the enhanced reporting requirements in their annual report. This led to a lower sample set than in previous years, which should be borne in mind when reading the figures below and in the report.

The key points arising out of the report are as follows:

93% of portfolio companies sampled in 2020 complied with the annual report disclosure requirements in the Guidelines, a drop from 100% in 2019. 60% prepared their disclosures to a “good” standard. This is a rise from 53% in 2020, but the figure has not recovered to its previous level of 73% in 2018.
However, PERG has highlighted business models, gender diversity, non-financial key performance indicators (KPIs) and environmental matters as areas where portfolio companies need to improve their reporting. In particular, PERG would like to see more information around diversity policies and actions, and better quantification of non-financial KPIs.
The report also reminds portfolio companies to improve reporting year-on-year to attain the same quality as listed companies. PERG notes that a disclosure measured as “good” three years ago may now be judged as only “basic” compared with listed companies.
Only 40% of portfolio companies included a statement of compliance with the Guidelines in their annual report. This is a significant drop from 76% in 2019. PERG has called this “disappointing”, given that the statement is “straightforward” and does not need to be “substantial”.
70% of portfolio companies published their annual report on their website in a timely manner. This is a drop from 80% in 2019, but PERG notes that some companies were granted extensions to their filing deadline due to the impact of Covid-19. Publication of mid-year reports remained steady at 68%, although still down from 74% in 2018.
All BVCA member firms published certain disclosures on their website to communicate information about themselves, their portfolio companies and their investors.

The report states that, given what PERG calls the “recent decline in high-quality reporting”, the BVCA will be following up with all private equity firms individually. In addition, PERG will monitor the impact of the UK’s changing narrative reporting landscape in 2021 and assess whether to update the content of the Guidelines.

Alongside the report, PERG and PwC have published an updated version of their Good Practice Guide, which is designed to provide guidance to portfolio companies and PE firms on how to apply the Guidelines.

GC100 initiates discussion on format of annual general meetings

The GC100 has published a discussion paper setting out a company perspective on the framework for holding annual general meetings (AGMs) of companies and for legislative reform to provide flexibility for companies to choose the format that best suits their needs.

The GC100 represents general counsel and company secretaries of the FTSE 100. It currently comprises 83 FTSE 100 companies and 42 former FTSE 100 companies.

The purpose of the discussion paper is to commence a debate with industry stakeholders on achieving a modernised approach to shareholder events. Although the paper is focussed on AGMs, the GC100 notes that many of its recommendations would also apply to other shareholder meetings.

Moreover, although the paper addresses general meetings in the listed company sphere, any reforms to the ways in which companies can hold general meetings and engage with stakeholders would likely need to be reflected in company law more generally. The discussion will therefore be relevant to other companies that regularly hold, or which may on occasion be required to hold, a general meeting.

The key points arising out of the paper are as follows:

The GC100 recognises the importance of physical AGMs for some investors but proposes a debate as to whether physical meetings are always the best way to meet the functions of an AGM.
It believes that the temporary flexibility introduced under the Corporate Insolvency and Governance Act 2020 has had a positive impact and that remote attendance can democratise shareholder meetings and increase participation, deepening shareholder engagement.
The current AGM regime should be reviewed so that positive experiences at 2020 AGMs can be extended to benefit more companies, their shareholders and other stakeholders.
The GC100 encourages the Government to amend the Companies Act 2006 to expressly permit virtual meetings so as to provide certainty that both virtual and hybrid meetings will be valid.
It also proposes to work with the Government, investor bodies and the Financial Reporting Council (FRC) to produce a code of best practice for virtual participation in shareholder meetings. This would address areas of concern, such as engagement with the board. The discussion paper contains a draft Code for consideration.
The paper also notes that the support of the FRC and investor bodies will be needed for companies to hold general meetings in the way they consider is in the best interests of shareholders. (In particular, it is worth noting that the Investment Association, an influential investor body, has previously opposed purely virtual shareholder meetings, and that Institutional Shareholder Services generally opposes purely virtual meetings except where necessary during the Covid-19 pandemic.)
Finally, the GC100 proposes a debate on further innovation in stakeholder engagement, including by encouraging companies to hold additional stakeholder engagement sessions outside of the formal AGM framework.

QCA responds to UK listing regime review

The Quoted Companies Alliance (QCA) has published its response to the Treasury’s recent call for views on ways to reform the UK’s listing regime.

The primary purpose of that review is to ensure that UK markets remain world-leading and fit for the future. For more information on the review, see our previous Corporate Law Update.

The key points arising out of the QCA’s response are as follows:

The QCA believes that the UK’s public equity markets are in need of significant reform, as demonstrated by the decline in the number of firms on the markets over the last twenty years.
It advocates creating a new growth-focussed market to emulate the success of the Nasdaq market in the United States. It believes the best way to do this is to “reinvent” the Standard Listing segment as a new mid-tier growth platform for mid-cap companies and a stepping stone from AIM to a premium listing.
The QCA believes that, although the new market would appeal to tech companies, it would provide listing opportunities for companies in all sectors and geographies. Rather than copying the Nasdaq model, it advocates a market designed specifically for the UK.
The QCA’s view is that the Standard Listing segment is a “tarnished product” that is seldom used, even when portrayed as a high-growth option. The reinvented Standard Listing segment would therefore need to be re-branded as a market targeted at specific types of company.
This new market would be the appropriate forum for making changes to free float requirements, dual-class share structures and track record requirements. This would also allow any reforms to the Premium Listing segment to remain more conservative, appealing to the low-risk appetite of investors that value strictly regulated stocks.

One factor which the response addresses briefly, but which we believe will be a critical factor in reforming the UK’s market, is the need to ensure that growth companies looking to access the broader equity markets can be included within market indices, such as the various FTSE indices.

Various investors, particularly investment funds, are restricted to investing in stocks that are included within a recognised index. The fact that only premium-listed companies are eligible for inclusion in key indices, such as FTSE 100, 250, SmallCap and All-Share indices, means that standard-listed companies and companies admitted to AIM, AQSE Growth or the High Growth Segment are currently unable to access these sources of equity finance and may receive less attention from analysts.

Also this week…

ISS publishes Covid-19 executive pay guidance for continental Europe. Institutional Shareholder Services (ISS) has published frequently asked questions (FAQs) on executive compensation during the ongoing Covid-19 pandemic. The FAQs apply to continental Europe, which, for these purposes, excludes the UK and Ireland, but they may be of interest to companies and investors in those jurisdictions.
ESMA updates Prospectus Regulation Q&A. The European Securities and Markets Authority (ESMA) has updated its Q&A on the Prospectus Regulation. New questions address (among other things) short financial periods, using the same prospectus for multiple offers, and the order of information in a prospectus. The updated Q&A do not technically apply to prospectuses published under the UK version of the Prospectus Regulation. However, in the absence of specific guidance from the Financial Conduct Authority, they may provide useful guidance.
ESMA publishes language requirements for EU prospectuses. The European Securities and Markets Authority (ESMA) has published a checklist setting out the languages in which the competent authority of each EU Member State will accept a prospectus for scrutiny and approval. The checklist is relevant for a UK company which is looking to offer equity or debt securities to the public, or admit securities to trading on a regulated market, in the EU.
EU proposes to mandate ESG diligence by market participants. The Legal Affairs Committee of the European Parliament has adopted a draft legislative initiative that, if enacted, would hold companies accountable for harming human rights, the environment or good governance. Among other things, the initiative would require companies that access the EU internal market (including companies based outside the EU, including UK companies) to conduct due diligence to identify, address and remedy their impact on human rights and the environment throughout their value chain.