Corporate Law Update

• Shareholders in a company were not able to claim against a third party for a loss in the value of their shareholding
• The Investment Association publishes its Principles of Remuneration for 2023
• The BVCA updates its Net Zero Statement

Shareholders could not claim against third party for loss in value of shareholding

The Court of Appeal has confirmed that continuing shareholders of a company in which a new investor took a 50% stake could not claim against the investor due to the “rule against reflective loss”.

Burnford and others v Automobile Association Developments Ltd [2022] EWCA Civ 1943, concerned a company with one major trade investor and several individual shareholders.

In 2015, the company’s shareholders entered into an investment agreement with Automobile Association Developments Ltd (AADL), a subsidiary of the Automobile Association (AA). Under that agreement, AADL took a 50% equity stake in the company.

The company subsequently went into administration. The administrators sold the company’s business to a company within the AA group at a price substantially lower than the company’s value at the time AADL had invested in it.

The company’s former shareholders brought claims against AADL. Specifically, they alleged that:

• AADL had made a number of fraudulent or negligent misrepresentations about the amount of business the investor’s group would pass to the company; and
• AADL had breached the investment agreement by “pursuing a course of conduct that undermined the basis of the arrangements” between the parties and the company.

However, the High Court found that the former shareholders were unable to bring the claims against AADL because the company had similar claims against AADL and so the so-called “rule against reflective loss” applied. The former shareholders’ claims were not separate and distinct from the company’s claims and merely reflected loss they had suffered to their shareholding. The High Court therefore stuck out their claims.

The former shareholders appealed, but the Court of Appeal affirmed the High Court’s decision.

You can read more about the case in our in-depth summary.

Investment Association publishes 2023 Principles of Remuneration

The Investment Association has published its Principles of Remuneration for the 2023 AGM season.

The Principles (which are updated annually) contain best practice guidelines and highlight investor expectations that publicly traded companies invariably follow to ensure shareholder support for their executive remuneration arrangements.

This year’s changes are minor and include the following clarifications.

• The Remuneration Committee’s discretion to determine remuneration outcomes should also reflect the experience of key stakeholders.
• Non-executive director (NED) fees have not always reflected the increased complexity and time commitment expected of the role. The Principles now clarify that a NED’s fees should reflect the time commitment, scope and complexity of their role and any increase should be explained.
• Remuneration committees should consider the overall quantum paid to executives in the context of pay across the entire workforce and seek not to increase executive pay beyond inflation or the rate of any wider workforce increases. If they do so, they should explain their reasoning.
• If a company recruits a new executive and sets their initial salary below the incumbent's salary (to reflect experience or expected development), it should clearly communicate its intended salary path and the timeframe in which it may increase salary levels.
• When setting performance conditions, remuneration committees should consider the collective impact of criteria to ensure they lead to a balanced assessment of the company's performance and there is appropriate natural tension between chosen metrics.
• If windfall gains arise within share or option schemes as a result of changes in the company’s share price and the remuneration committee has not scaled back grant sizes, it should take this into account when exercising its discretion in relation to vesting outcomes.

BVCA updates its Net Zero Statement

The British Private Equity and Venture Capital Association (BVCA) has updated its Net Zero Statement, following the COP27 conference and the publication of the Government’s new net zero policy paper, “Build Back Greener”.

The updated BVCA statement sets out the BVCA’s support for the Paris Agreement and its commitment to ensuring that the UK’s private equity and venture capital (PE/VC) industry plays a leading role in global efforts to eliminate the causes and combat the effects of climate change.

In particular, the BVCA is encouraging the PE/VC industry to deepen its engagement on net zero and broader climate issues, including through engagement with initiatives such as iCI, IIGCC, Ceres and the Investor Climate Action Plans Expectations Ladder and Guidance.