Corporate Law Update
- A beneficial owner of shares that were being sold was liable under the sale contract, despite not being named as a party
- The Government confirms it will expand the UK’s Dormant Asset Scheme to other kinds of investment, including listed shares
- The BVCA publishes its response to the Government’s consultation on mandatory notifications under its proposed national security screening regime
- The BVCA publishes the results of its latest Covid-19 impact survey
- The Association for Financial Markets in Europe publishes revised selling restriction wording for issuers of securities following the end of the UK/EU transition period
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.
The Court of Appeal has held that a buyer of shares arguably had a right to claim against one of the beneficial owners of those shares for breach of the share sale agreement (SPA), even though that beneficial owner was not named as a party to the SPA.
Bell v Ivy Technology Ltd  EWCA Civ 1563 concerned the sale of the beneficial interest in the shares in four online gambling companies.
50% of the beneficial interest in those shares were held by one individual (B) and the other 50% was held by another individual (M). However, despite this, the SPA was signed only by M and the buyer. B did not sign it and was not named as a party to it.
Following the sale, the buyer brought various claims against M, including for fraudulent misrepresentation, breach of contract (namely, breach of warranty in the SPA) and restitution.
Some time later, the buyer applied to amend its claim to bring claims for breach of the SPA against B as well as M. The buyer claimed that M had acted as B’s agent in relation to B’s 50% interest in the shares, and that B was therefore M’s “disclosed principal”. On that basis, the buyer said, although B was not named as a party to the SPA, B was a party to it and could be sued.
In essence, the judges had to decide where there was any merit in two particular arguments:
- Was M in fact acting as B’s agent, such that (in principle) B was a party to and bound by the SPA?
- If the answer to that was “yes”, did the SPA explicitly state that B should not be considered a party to the SPA (so that B could not be liable under the SPA)?
What did the court say?
In short, the court said that there was a real prospect of concluding that B was a party to the SPA and that his liability had not been excluded.
The judges acknowledged that B had not been named as a party to the SPA – indeed, the definition of “Parties” in the SPA specifically referred to M and the buyer, not B. In addition, the recitals to the SPA (which formed part of its operative provisions) stated (it would seem, incorrectly) that M held all of the beneficial interest in the shares and that no-one other than M had any interest in them.
At first glance, this might seem to suggest that M and the buyer had not intended for B to be a party to the SPA. However, it had been clear to the buyer before signing the SPA that 50% of the beneficial interest in the shares was held by B. The court said there was a “stark discrepancy” between what the buyer knew about the beneficial ownership of the shares on the one hand, and the terms of the SPA (which did not name B as a party) on the other hand. This discrepancy “cried out for an explanation”.
B also argued that, even if M had been acting as his principal, the terms of the SPA expressly excluded him from having any rights or liabilities under it. In particular, he pointed towards a clause that read:
Nothing in this Agreement, express or implied, is intended to confer upon any third parties other than the Parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
B claimed that, because he was not included within the express definition of “Parties”, the effect of this clause was to remove his liability under the SPA.
The court agreed that this was a “cogent” argument. However, the judges felt that there was nevertheless a real prospect that, when reading that clause in light of the surrounding facts, a court would conclude that the clause in question did not prevent B from being liable under the SPA. Although B was not named or defined as a party, the clause did not expressly exclude his liability under the SPA. It the parties had intended to do that, they could have said so in the SPA.
It is worth noting that the court was not being asked to determine whether B was in fact a party to the SPA. Rather, the judges merely needed to decide that there was a real prospect of the buyer successfully arguing that B was a party to, and liable under, the SPA. They thought there was.
What does this mean for me?
The judgment shows the risk of selectively including parties to a contract or of treating the list of named parties to a contract as definitive. There may be sensible commercial reasons why a person interested in assets is not to be a party to the contract for their sale. If so, the parties should consider setting out that rationale and, to ensure certainty, expressly excluding any liability of that party.
Normally, however, where shares are co-owned or held in trust, it will be sensible or logical to join both legal and beneficial owners to a sale contract. In some cases, this will be because the trustees are merely nominees and it is the beneficial owners who are acquainted with the business and in a position to provide commercial warranties. It may also be appropriate for beneficial owners to give non-compete or other restrictive covenants, even if they are not legal owners. Each transaction should be considered on a case-by-case basis.
It may also be worth making it clear in the contract whether the parties are contracting solely on their own behalf or, alternatively or additionally, as agent for someone else. This may help clarify who is potentially liable under the contract at a later date.
The Government has confirmed that it intends to expand the UK’s Dormant Assets Scheme to other classes of investment, including listed securities.
The confirmation follows the Government’s previous consultation on expanding the Scheme, which was launched in February 2020.
Currently, the Scheme allows participating banks and building societies to apply monies standing to the credit of long-dormant bank accounts towards charitable purposes if they are unable to establish contact with the owner of those monies. The monies are transferred to the authorised reclaim fund – Reclaim Fund Limited – and, from there, distributed to good causes across the United Kingdom.
To date, over £650 million has been applied through the Scheme, including to assist help young people into work, offer affordable credit to families in financial difficulty, to address environmental issues and to mitigate the impact of the on-going Covid-19 pandemic.
Under the expansion, the Scheme will apply to proceeds and distributions from other kinds of financial products and instruments, including insurance and certain retirement income policies (provided they crystallise to cash), shares in collective investments and investment assets (including Stocks and Shares ISAs), and shares in publicly traded companies (including on the Main Market or AIM).
In each case, the Scheme will be voluntary: a financial institution or company will need actively to opt into the Scheme in order to be able to donate to the reclaim fund.
As at present, proceeds will be transferred into the Scheme only if they are “dormant”. Before transferring assets into the Scheme, an organisation will need to follow the TVR procedure – Trace the asset owner, Verify their identity, and attempt to Reunify them with their asset – in accordance with best practice in their sector.
If assets are transferred into the Scheme and the owner later resurfaces, they are able to claim compensation from the Scheme. The Scheme is effectively underwritten by the authorised reclaim fund, which holds a certain amount back to meet potential compensation claims.
The Government estimates that the expanded Scheme could potentially release up to £880 million of dormant value for good causes within the UK. It now intends to legislate for the expanded Scheme as Parliamentary time allows.
Macfarlanes is proud to have assisted the Government on the proposed expansion of the Dormant Assets Scheme.
The British Private Equity and Venture Capital Association (BVCA) has published a response to the Government’s recent consultation on the sectors which would trigger a mandatory notification under the proposed new National Security and Investment Bill. (The consultation closed on 6 January 2021.)
For more information on that consultation and the proposed new national security regime generally, see our previous Corporate Law Update.
The BVCA has raised the following points in its response:
- The BVCA considers that, if calibrated correctly, the new regime should help in ensuring the UK remains an attractive location for investment. However, the regime must strike a balance between protecting genuine areas of critical national security interest and raising unnecessary hurdles for foreign investment in UK infrastructure and businesses.
- The BVCA is concerned that, as currently framed, the regime will lead to a large number of voluntary notifications and a huge number of mandatory notifications, resulting in a “flood of notifications relating to transactions constituting no threat to national security”.
- In particular, the BVCA is concerned about the impact of the regime on venture capital funding for innovative UK-based start-ups and growth businesses in high-tech sectors (such as quantum technologies, engineering biology, artificial intelligence and others), where investment depends on speed of execution and low transaction costs.
- The proposals therefore have the potential to delay and increase the cost of transactions in this area, in turn reducing the appeal of the UK for international early-stage innovators.
- The Bill in its current form cuts directly across other Government policy goals, such as December’s consultation on restricting non-compete clauses, which aims to unleash innovation. (For more information on that consultation, see our previous Corporate Law Update.)
- The Government should define the mandatory notification sectors narrowly and clearly and limit notification to those parts of the sectors that pose a risk to national security. As proposed, the BVCA believes the sectors are too broad and lack sufficient clarity.
- In particular, the BVCA highlights specific concerns of its members about the breadth of the proposed definitions of “engineering biology”, “data infrastructure” and “artificial intelligence”, which represent significant sectors for firms that investment in deep technology.
- The response also provides comments on the specific definitions of other sectors relevant to early stage businesses, including advanced materials, advanced robotics, communications, computing hardware, and critical supplies to government and emergency services.
- The BVCA notes that the Government has proposed thresholds below which a mandatory notification would not be required for some sectors but not for others. It recommends including specific thresholds for all of the sectors.
- It also alludes to including a definition of “risk to national security”, in line with foreign investment regimes in other jurisdictions.
- The BVCA is also proposing a series of “exemptions” to minimise the impact of the regime on business. These would include acquisitions by funds managed by regulated managers, business that have already been vetted by the UK Government or a UK regulator, and businesses whose ownership structure conforms to an “approved set of criteria” that limit control appropriately.
- The BVCA also suggests including an “excepted investor” framework similar to that found in the CFIUS regime that operates in the United States and, more broadly, a means of providing blanket clearance for individual acceptable acquirers and targets.
- To handle the likely number of notifications, the new Investment Security Unit (ISU) will need “sufficient, appropriately skilled resources”, a detailed operational and technical understanding of the relevant sectors, and appropriate senior links with relevant officials.
- Where a notifiable transaction is completed without approval, it should be voidable by the Government, not automatically void.
Also this week…
- BVCA publishes latest Covid-19 survey results. The British Private Equity and Venture Capital Association (BVCA) has published the results of its most recent survey on how Covid-19 has impacted the activities of its members and their portfolio companies. The survey includes information on portfolio companies’ applications for Government support and on the BVCA’s recommendations to Government.
- AfME updates selling restrictions wording. The Association for Financial Markets in Europe (AFME) has published revised wording for the selling restrictions most commonly put in place on equity transactions. The new wording reflects the expiry of the UK/EU transition period at 11:00 p.m. UK time on 31 December 2020 and the fact that EU law no longer applies directly in the UK. The wording replaces the previous wording published by AfME for use during the implementation period.