Corporate Law Update

In this week's update: The Government consults on new powers to block listings on national security grounds, a claim for breach of warranty was invalid because it contained insufficient detail, the BVCA responds to the FCA’s consultation on SPACs and a few other items.

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Government consults on power to block listings on national security grounds

Following previous indications, the Treasury has published a consultation on a new power for the UK Government to block a corporate listing in the UK if it perceives there to be a risk to national security.

The proposals are separate to the Government’s power to block acquisitions and investments on national security grounds in the recently enacted National Security and Investment Act 2021, which is due to come into effect later this year.

The consultation notes that the scenarios in which a company listing in the UK could be detrimental to the nation’s security are “remote but possible” and that any power to block listings would be “precautionary”. The Government intends for the power to be “targeted”, to have minimal impact on the listing process, and not to affect the vast majority of companies seeking to raise capital on UK markets.

The key aspects of the proposals are as follows:

  • The power to block listings on national security grounds would lie with the UK Government. The Financial Conduct Authority (FCA), which administers the UK’s listing regime, would retain broad powers to block listings on other grounds, where the listing would be detrimental to the interests of investors. However, the Government does not believe it would be appropriate to delegate power to protect the national interest to an independent, financial regulator.
  • The power would apply to “listings” in the broadest sense. In other words, the Government would be able to block an initial equity listing or admission on any UK public market. This would include the London Stock Exchange’s Main Market, High Growth Segment, Professional Securities Market and AIM, as well as the AQSE Main Market and Growth Market.
  • The power would apply only to primary equity listings. Secondary trading would not be covered, and the power could not be used to force an existing listed company to delist.
  • The power would apply only to listings of equity securities, including not only shares but also securities representing shares, such as global depositary receipts (GDRs) and convertible instruments. The Government is not currently proposing to include debt securities within the proposed power but is seeking views on this.
  • For the purposes of enabling the Government to assess whether to block a listing, a prospective issuer would need to disclose specific information, including the nature of its operations, the markets in which it competes, and the identity of its managers and ultimate controllers. The consultation notes that much of this information already needs to be disclosed as part of existing admission procedures, and so this should not present a significant burden for issuers.
  • The Government is also considering an “early disclosure option” so that a company can seek assurance that its listing would not be blocked before it prepares and submits the documentation for that listing (such as a prospectus or admission document).

The Treasury has asked for responses by 27 August 2021.

Court strikes out parts of a buyer’s warranty claim

The High Court has struck out parts of a buyer’s warranty claim because the notice of claim did not contain sufficient details of the claim.

What happened?

TP ICAP Ltd v NEX Group Ltd [2021] EWHC 1375 (Comm) concerned the sale of shares in a company whose business was “voice broking” (in contrast to other forms of broking generally conducted through electronic trading platforms).

The sale was governed by a sale and purchase agreement (SPA). As is usual, the SPA included various warranties by the seller as to the state of the target company’s business. These included a warranty that no target group company had contravened applicable law or regulation in a way that had resulted or may result in any fine, penalty or other liability or sanction having a material adverse impact on the operation of the business of the group (the breach of law warranty).

Again, as is usual, the SPA required the buyer to notify the seller of a claim for breach of warranty within certain time limits, and it required the buyer’s notice to state, in reasonable detail, the nature of the claim and, if practicable, the amount the buyer was claiming.

Following completion of the sale, the buyer sent the seller notice of claims which it intended to bring for breach of warranty relating to investigations by the US Commodities and Futures Trading Commission, the Financial Conduct Authority and various German authorities, as well as potential civil claims, regarding the target group’s involvement in dividend arbitrage trading schemes (“cum-ex” trading).

The notice of claims stated that the buyer had become aware of facts or circumstances giving rise to one or more claims for breach of warranty, including the breach of law warranty and certain tax warranties, as a result of the investigations and potential claims. It also stated that the buyer might incur loss in the event of a finding against the target group.

However, as the investigations and claims were ongoing, the notice did not state that there had in fact been a breach of applicable law or regulation, nor did it state the alleged material adverse impact on the operation of the target group’s business as a whole. In particular, the notice stated that the buyer was notifying the seller of its claims “on a contingent basis” on the basis that claims might arise.

The seller applied to court to strike parts of the buyer’s claim out on the basis that the buyer had not notified the claims in accordance with the SPA.

What did the court say?

The court agreed with the seller.

The judge noted that the clause setting out how and by when the buyer had to notify a breach of warranty was a limitation clause. Exactly what the buyer had to notify therefore needed to be determined by reference to the warranty in question.

In relation to the breach of law warranty, the judge said that the notice needed to:

  • describe the broad nature of the contravention of law or regulation, including by identifying the relevant law or regulation;
  • make it clear that, as a result, the buyer was claiming for breach of warranty; and
  • describe how any fine, penalty or other liability had had or would have a materially adverse impact.

The court said the buyer’s notice was invalid. It had not made it clear a claim was being lodged; rather, it stated only that the circumstances “may” give rise to one or more claims.

The judge also rejected the argument that the buyer had notified the claim on a “contingent” basis. The judge noted the possibility that an ongoing investigation might not reveal any breach of law or regulation. It was not possible for the buyer to say that there had been conduct that “might result” in a contravention of law. The contravention needed to have happened for a claim to exist.

What does this mean for me?

It is a long-standing principle that, where a contract requires a notice to contain prescribed information, it must do so. This case is a useful reminder that, when providing the information required by an SPA (which will often be “full” or “all” particulars of the claim), the wording of the warranties will inform the detail that needs to be included in the claim notice.

In this case, for example, the warranty was restricted to “materially adverse consequences” for the target business. This required the buyer to set out significant further detail above and beyond that which might otherwise have been required.

It is therefore important to review the wording of each relevant warranty carefully when drafting a notice of warranty claim to ensure that the notice addresses each element of the warranty. If it fails to do so, it could end up being invalid.

The judgment also highlights the difficultly of notifying a “contingent claim” where there is no express provision allowing this. A buyer should ensure that the SPA makes it clear how contingent claims are to be addressed, for example by extending the time limit for notifying such a claim.

Also this week…

  • BVCA responds to FCA consultation on SPACs. The British Private Equity and Venture Capital Association (BVCA) has published its response to the recent consultation by the Financial Conduct Authority (FCA) on changes to the listing regime for special purpose acquisition companies (SPACs). (See our previous Corporate Law Update for more information on that consultation.) The BVCA broadly agrees with the FCA’s proposals but notes that the consultation does not address the desire to include growth projections in a prospectus for a SPAC and proposes the introduction of a US-style “proxy statement”, partly in place of the FCA’s proposed “fair and reasonable statement”.
  • LexisPSL publishes 2020/2021 ECM tracker report. LexisPSL Corporate has published its Market Tracker Trend Report for equity capital markets for 2020/2021. The report examines current market trends in respect of ECM transactions during 2020, using 2018 and 2019 ECM transactions for comparative purposes. It follows a review of 597 transactions on the London Markets: 174 IPOs (106 on the Main Market and 68 on AIM) and 423 secondary offers (230 on the Main Market and 193 on AIM).
  • QCA publishes research into SME board performance reviews. The Quoted Companies Alliance (QCA), Downing LLP and Henley Business School have published a research report on board performance reviews in small and mid-sized quoted companies. The research (which was based on 100 survey responses) identifies three broad categories of company: proactive (typically larger companies), which conduct regular reviews, set explicit objectives, follow up previous evaluations, and effectively apply and adapt recommendations; reactive, which take some but not all of these actions; and inactive (typically smaller companies), which do not carry out performance reviews. The report has also informed the QCA’s new Board Performance Review Guide, which is available in PDF format from the QCA (free for QCA members and at a charge for non-members).
  • ECJ clarifies jurisdiction for claims for publication of inaccurate statements. In Vereningen van Effectenbezitters v BP plc (C-709/19) (12 May 2021), the European Court of Justice clarified the EU jurisdiction in which an action must be brought to claim for losses arising out of an investment decision based on incorrect, inaccurate or misleading statements published by an issuer. (In the UK, section 90A of the Financial Services and Markets Act 2000 provides this remedy.) The Court confirmed that, under article 7(2) of the Recast Brussels Regulation (1215/2012), the company must be sued in the jurisdiction in which its reporting obligations arise, not the jurisdiction in which the investment decision is made. The decision is not binding on the UK courts, but they may have regard to it under section 6(2) of the European Union (Withdrawal) Act 2018.
  • ECJ clarifies rights of qualified investors under Prospectus Directive. In Bankia SA v Unión Mutua Asistencial de Seguros (UMAS) (C-910/19) (3 June 2021), the European Court of Justice clarified that, where a prospectus is addressed to both retail investors and qualified investors, qualified investors are entitled to bring proceedings for damages based on the information given in the prospectus. The Court also confirmed that national laws may fail account of the fact that qualified investors were, or ought to have been, aware of the issuer’s economic situation. The ruling relates to the EU Prospectus Directive but should apply equally to the EU Prospectus Regulation. The decision is not binding on the UK courts in relation to the UK version of the Prospectus Regulation, but they may have regard to it under section 6(2) of the European Union (Withdrawal) Act 2018.
  • EU climate change taxonomy screening criteria published. The text of the EU Climate Taxonomy Delegated Act has been published. The purpose of the Act is set out technical screening criteria, specifically for climate change mitigation and climate change adaptation, within the broader EU climate taxonomy framework to assist investors with deciding whether to invest in particular businesses. The Act will be effective from 1 January 2022. It will not apply directly in the UK but will be relevant to persons looking to invest in businesses within the European Union.