Corporate Law Update
- The Takeover Panel orders the first suspension of an offer timetable under the new Takeover Code rules
- Minority shareholders in a company could not claim unfair prejudice in relation to the personal conduct of majority shareholders
- A not-for-profit company whose constitution prohibited distributions to members could not transfer property to its members
The Takeover Panel has published a statement confirming it has agreed to suspend the timetable under an ongoing offer to allow the parties to seek a regulatory clearance.
Following changes to the City Code on Takeovers and Mergers (the Code) that became effective on 5 July 2021, the Panel now has the power to “suspend” an offer timetable if, by Day 37, any condition of the offer relating to an “official authorisation or a regulatory clearance” has not been satisfied. It will do so only if both the offeror and the target company request, or if one of them requests and the authorisation or clearance in question is “material” in the context of the offer.
If the Panel does grant a suspension, the offer timetable will recommence on the date on which the last condition relating to an official authorisation or regulatory clearance is satisfied or waived.
Prior to the changes to the Code, an offer timetable would be suspended only to await the outcome of a Phase 1 merger control investigation by the European Commission or the Competition and Markets Authority.
To our knowledge, this is the first time the Panel has suspended a timetable under the new rules. The Panel’s decision in this context will no doubt be followed closely as advisers look to understand what will and will not qualify as an “official authorisation or a regulatory clearance” for these purposes.
In this case, the decision concerns approval from the Financial Conduct Authority (FCA) for an increase in control of the target. The condition in question relates to the offer for motor dealership Marshall Motors Group plc by CAG Vega 2 Limited, a wholly-owned subsidiary of used car marketplace provider Constellation Automotive Holdings Limited.
Alongside the traditional acceptance condition, Constellation’s offer document stated that the offer was conditional on the FCA approving the increase of Constellation’s level of control in Marshall Motors or being treated as having approved it.
In this case, both Constellation and Marshall Motors requested the suspension.
It is interesting to see the application of the new rules. Given that the new rules apply only to bids structured as a contractual offer, rather than a scheme of arrangement, we do not expect to see them applied frequently. (In 2021, 82% of firm offers were structured as a scheme of arrangement.)
The Court of Appeal has confirmed that minority shareholders in a company cannot bring a petition in unfair prejudice where the behaviour in question does not amount to an act or omission of the company or the conduct of its affairs.
In Primekings Holding Ltd v King  EWCA Civ 1943, minority shareholders brought a petition in unfair prejudice, claiming the majority shareholders had mounted a concerted campaign to exclude them from participating in the management of a company and to acquire their shares at an undervalue.
Under section 994 of the Companies Act 2006, a member of a company can apply to the court for relief if they suffer unfair prejudice as a result of an act or omission of the company or the way in which the company's affairs have been conducted. The court has a wide discretion when deciding what relief to grant, although the most common remedy is an order that the majority buy out the minority’s shares.
In this instance, the minority alleged numerous grounds of complaint. However, the court refused to allow them to pursue certain complaints because those complaints related to the personal conduct of the majority shareholders and not the conduct of the affairs of the company.
The decision is a clear reminder to minority shareholders who feel they have endured unfair conduct. To claim relief, a shareholder will need to demonstrate that conduct of the company has caused unfair prejudice. Conduct by other shareholders will not give grounds for complaint unless it has enabled or given rise to unfairly prejudicial conduct of the affairs of the company.
For a more detailed analysis, please see this summary of the case by our colleagues James Popperwell, Ed Llewelyn-Evans and Alex Douty.
The Court of Appeal has held that the directors and only shareholders of a company were not entitled to transfer the company’s assets to themselves because the company’s constitution prohibited distributions.
Ceredigion Recycling & Furniture Team v Pope and Cann  EWCA Civ 22 concerned a company limited by guarantee that had been established to take over a local recycling project.
The company’s constitution stated that the company’s income and property were to be applied solely towards the purposes for which it has been established and not to be paid or transferred to the company’s members. (There was an exception for reasonable and proper wages, bonuses and repayments of expenses.)
The constitution also stated that members could change this restriction on distributions by a unanimous vote at a general meeting.
It is common to see restrictions on transfers of assets in the constitution of a charitable, quasi-charitable, community-focused or other not-for-profit company or society. These restrictions are sometimes known as an “asset lock” and are designed to ringfence assets for the original purpose of the company. They can take the form of an outright prohibition on distributions to members (as in this case) or a restriction on transferring assets for less than a particular value (normally, market value) other than for particular purposes.
One of the company’s principal assets was a property in Aberystwyth. In 2012, the company’s two directors, who were also its only members, decided to transfer interests in that property into their self-invested pension plans (SIPPs), then to lease the property back to the company. By 2014, 95% of the beneficial ownership of the property had been transferred into those SIPPs. The property was later transferred to the pension provider.
In late 2014, the arrangement made the press and received negative publicity. Two new directors were (in the court’s words) “co-opted” onto the board. Over the next three years, the two original directors resigned. Finally, in 2019, the company brought proceedings against the original directors, claiming that, by transferring the property to their SIPPs, they had breached their duties to the company.
The directors put forward various arguments in response. These included that they had been the only shareholders of the company at the time and that, as a result, they had taken a decision under the Duomatic principle to remove the restriction on distributions.
Under the Duomatic principle, where all the members of a company give their unqualified, informal assent to a matter that would have required a resolution in general meeting to be effective, that matter is effective even if no resolution was passed (provided the assent is unanimous).
What did the court say?
The court disagreed. It said the Duomatic principle could not apply for two reasons:
- The principle did not allow the director-members to do informally what they were not permitted to do by resolution. The company’s constitution did not allow the members to pass a resolution permitting them to distribute assets to themselves. The court was not prepared to interpret the members’ decision as effectively amending the constitution.
- The company had taken advantage of section 62 of the Companies Act 2006 (the Act). Section 62 allows a company that was incorporated before 1 October 2009 not to include the word “Limited” or “Ltd.” (or the Welsh equivalents, “cyfyngedig” or “cyf.”) in its name if (among other things) it requires its income to be applied in promoting its objects and prohibits distributions of income and assets to its members. Because of this, it was not open to the members to remove the restriction.
What does this mean for me?
This was merely a decision on whether to allow an appeal from an earlier judgment, and so it has limited precedent value.
Nevertheless, it is important for owners and directors of not-for-profit companies with an asset lock. This includes not only charities, but also other not-for-profit companies, such as companies serving the local community, clubs, associations and companies formed for particular non-profit purposes.
Often, these companies can be closely held, with the members serving as directors. Directors in this situation must remember that the company has been established for a particular purpose and that, even if closely held, it is not merely a personal vehicle of the members.
If the constitution of such a company contains any restrictions on distributions, directors should think carefully before transferring any assets to any of the company’s members or anyone connected with its members. They should also ensure they understand whether the company is receiving market value for any assets it transfers, as this could be relevant both to the asset lock and to whether the transfer amounts to a distribution.
Some further thoughts
The fact that the Duomatic principle could not help the directors in this case is not wholly surprising. Generally, the courts will apply the principle only if the members knew actively what they were agreeing to but there was simply a procedural defect. Here, however, the members do not appear at the time to have had amending the company’s constitution in mind.
The situation is not always so clear, however. We have seen several cases where all the members of a company act contrary to its constitution and the court finds that, by doing so, they have implicitly agreed to amend it. A good example is the Sherlock Holmes Society case, where the court held that members of a company informally amended a company constitution when they appointed directors to the board who did not satisfy the requirements in the constitution. It is always worth, therefore, considering whether to plead Duomatic anyway where the formalities of the company’s constitution have not been strictly followed.
The decision that section 62 prevented the members from removing the company’s asset lock is interesting. It suggests that any attempted amendment would be ineffective (unless, presumably, the company satisfied another condition for dropping the word “Limited” from its name), because statute does not envisage a company dispensing with that word unless it meets a condition for doing so.
(Section 62 applies to companies incorporated before 1 October 2009, but a similar exemption applies to companies incorporated on or after that date under section 60(1)(b) of the Act and paragraph 3(1) of the Company, Limited Liability Partnership and Business (Names and Trading Disclosures) Regulations 2015.)
There is some logic to that, but it seems at odds with section 64 of the Act, which states that the Secretary of State can order a company to change its name to include the word “Limited” if it ceases to be entitled to the exemption. This seems to suggest (implicitly, at least) that a company can amend its constitution to remove the provisions that entitle it to drop the world “Limited” (i.e. its asset lock).
Nonetheless, for the time being, the position is that a company that has relied on an asset lock to omit the word “Limited” cannot remove it unless, presumably, it changes its name to include the word “Limited”. Any attempt to remove the asset lock should be regarded as ineffective.