Corporate Law Update
- The UK Government announces its first blocking of an acquisition under the UK’s national security screening regime
- The new register of overseas entities will now open in stages
- The UK publishes its first annual report on the state of the financial services sector, following Lord Hill’s review
- New sanctions prohibit the supply of accounting, consultancy and PR services to Russia
- The FRC publishes new good practice guidance on holding company general meetings
- A new Capital Markets Industry Taskforce is created to maximise the UK’s ongoing capital market reforms
- Shares issued by a public company on a share-for-share exchange had to be paid for in cash
The UK Government has published details of a final order blocking the acquisition of certain intellectual property rights under the UK’s new national security screening regime, set out in the National Security and Investment Act 2021.
The order relates to the proposed acquisition of intellectual property relating to vision-sensing technology, which the Government states has “dual-use” application and could be used to “build defence or technological capabilities” that pose a risk to the UK’s national security.
The order is particularly interesting in three respects.
- This is the first time the Government has blocked a transaction under the regime.
- The order relates to a licence of intellectual property rights, rather than an acquisition of intellectual property per se, highlighting the sheer breadth of the new regime.
- The order blocks the acquisition of an asset. An acquisition of an asset does not trigger a mandatory notification, even if the acquisition occurs in one of the 17 sensitive sectors. It is interesting that the first transaction blocked under the regime is one that will not have involved a mandatory notification.
Companies House has started to publish more detail on the new Register of Overseas Entities, which is due to go live on 1 August 2022.
Under the regime, an overseas entity that holds or wishes to acquire certain types of real estate in the UK will need to register with Companies House and provide details of its “beneficial owners” and (in some cases) managing officers and any trusts that sit within its corporate structure.
We reported last week that Companies House had published a blog indicating that the regime would go “live” on 1 August 2022 and that overseas entities looking to acquire real estate on or after that date would need to register with Companies House before they could complete that acquisition.
We also noted that an overseas entity would not be able to apply to register with Companies House unless its information had first been verified, and that verification would need to be conducted by a regulated person (a verifier) that would itself need to pre-register with Companies House. We warned that this sequence of events had the potential to disrupt the timetable for acquisitions of real estate due to complete on or shortly after 1 August 2022.
Since then, Companies House has confirmed, in a stakeholder newsletter sent on 22 July 2022, that the new register of overseas entities will commence in stages. According to the newsletter, the timetable for implementation of the new regime is likely to be as follows.
- Companies House has now launched the facility for applying to become an approved verifier. Regulated persons wishing to act as verifiers for overseas companies can now apply to register and obtain an “agent assurance code” by sending a completed Form AG01 to Companies House by email. More information is set out in this new guidance note from Companies House.
- The register of overseas entities will open for applications on 1 August 2022 (as originally indicated). Provided the relevant information has been verified by an approved verifier, overseas entities will be able to apply to register with Companies House from 1 August 2022. More information, including how to submit an application and accompanying information, is set out in this new guidance note from Companies House.
- The “land registration elements” of the regime will come into force on 5 September 2022. This is designed to allow time for those currently engaged in a land acquisition in England or Wales to register with Companies House and obtain an overseas entity ID number, which will be needed to apply to register the change in ownership with HM Land Registry. However, the “transitional period” will still begin on 1 August 2022.
This new timeline has two principal consequences:
- From 5 September 2022, an overseas entity will not be able to apply to register a transfer of a relevant type of real estate into its name unless it has registered with Companies House.
- Overseas entities that already hold a relevant type of real estate will have until (and including) 31 January 2023 to register with Companies House. After that date, an overseas entity that has not registered will not be able to dispose of that real estate, grant a lease over it for seven years or more, or charge it by way of security.
As we noted last week, there remain potentially significant obstacles to a regulated person conducting verification for an overseas entity. Some information to be provided to Companies House may be difficult or, in practice, impossible to verify to a standard which a regulated person can stand behind. It is natural that regulated persons may feel unable to verify information in the absence of further guidance from the Government on what is expected of them.
The City of London Corporation, in partnership with HM Treasury, has published its first annual report on the state of the UK’s financial services sector, following recommendations from the report from the UK Listing Review, chaired by Lord Hill (see our previous Corporate Law Update).
The report sets out work undertaken during the past year in relation to financial services and the UK’s capital markets more broadly, and the steps the Government intends to take in various areas to further implement the recommendations from the Hill Review.
Within the context of the capital markets and equity financing, the report notes opportunity in further reform and innovation for fund structure offering in the UK (such as listing alternative funds in line with the practice developing in Singapore), enabling access to private markets to a broader spectrum of investors (for example, through tokenisation) and fostering a new investment culture to unlock more investment in growth companies that favour innovation and long-term growth over dividends.
To foster innovation, the report notes that the Government will explore the application of distributed ledger technology (DLT) (including blockchain), stablecoins, cloud services and artificial intelligence within the UK’s financial ecosystem (in both public and private markets), as well as technological solutions to ESG data and analytics.
Finally, the Government intends to publish an updated Green Finance Strategy, work to deliver sustainability disclosure standards and “rally other countries” around new International Sustainability Standards for financial reporting. It will make a decision in 2022 about whether to bring ESG ratings firms within the regulatory perimeter, and it will consult on drafting technical screening criteria for the UK’s green taxonomy.
New sectoral sanctions have come into force that prohibit a person from providing accounting, business and management consulting or public relations services to a person connected with Russia.
The Russia (Sanctions) (EU Exit) (Amendment) (No. 14) Regulations 2022 define each of these categories of service precisely. It is therefore important to understand precisely what services fall within each definition to appreciate the breadth of the new ban.
Accounting services include reviewing or compiling financial statements, bookkeeping services and other services (such as attestations, valuations, and preparing pro forma statements). It does not, however, include audit services, and it includes preparing business tax returns only if provided alongside compiling financial statements for a single fee.
Business and management consulting services include management auditing, market management, human resources, production management and project management consulting services. However, this list is not exhaustive, and this category will include any advisory, guidance and operational assistance services provided for business policy and strategy and the overall planning, structuring and control of an organisation.
Public relations services include any services relating to improving a person’s or organisation’s image and their relationship with the general public and other institutions. However, it does not include planning and creating services for advertising or public opinion polling services.
In each case, a person who provides prohibited services automatically commits a criminal offence, although there is a defence if that person can show that they did not know (and had no reasonable cause to suspect) that they were providing services to someone connected with Russia.
For more information on the new ban, see this blog by our colleagues Neill Blundell, Helen Harvey and Imogen Courtney.
The Financial Reporting Council (FRC) has published new guidance for listed companies and shareholders, designed to provide suggestions for good practice when holding annual general meetings (AGMs) and other general meetings.
The guidance is helpfully divided into seven principles, with further explanations of how each principle can be applied in practice. Those principles are as follows.
- Information disseminated before the meeting should offer clear instructions on how to attend the meeting and participate so as to enable effective engagement.
- Shareholders should be able to engage in the business of the meeting, whether it is held as a physical, hybrid or virtual meeting.
- At the AGM, the board should provide an update on matters raised by stakeholder groups that materially affect the company’s strategy, performance, and culture.
- Companies should seek the broadest participation in meetings by a range of shareholders. Shareholders should have the opportunity to raise questions pertinent to the meeting agenda.
- Shareholders should be able to vote in real time or submit their vote in advance via a proxy, depending on the meeting format. Companies should use appropriate technology to ensure shareholders can appoint proxies and send them instructions before the meeting.
- Companies should be transparent as possible with shareholders on matters discussed and raised by shareholders at the meeting.
- Companies should offer multiple opportunities to update shareholders on company matters throughout the year, ensuring all shareholders have access to similar information.
The London Stock Exchange has announced the creation of a new Capital Markets Industry Taskforce.
The stated purpose of the Taskforce is to maximise the impact of capital market reforms and to stimulate industry engagement to ensure that the UK’s capital markets serve those who seek capital and those who have capital to invest.
The Taskforce will also consider how the UK’s capital markets ecosystem can evolve and support the current and potential future regulatory change to ensure the focus on implementing reform continues and is effectively embedded.
The creation of the Taskforce follows the publication of several recent recommendations and reforms of the UK’s capital markets, including:
- HM Treasury’s review outcome on its proposals to reform the UK’s prospectus regime, published in March 2022 (see our previous Corporate Law Update);
- the Financial Conduct Authority’s proposals to reform the UK’s listing regime, published in May 2022 (see our previous Corporate Law Update); and
- the recommendations of the UK Secondary Capital Raising Review, published last week (see last week’s Corporate Law Update).
The Taskforce will be chaired by Julia Hoggett, CEO of London Stock Exchange plc and comprise representatives from the investment banking, asset management, venture capital, pension fund, listed company, private company, legal, and accounting and audit sectors.
The Court of Appeal has held that shares issued by a public company in connection with a share-for-share exchange had to be paid for in cash.
The case concerns a public company registered in England under the Companies Act 2006 (Zavarco plc) that had been incorporated to act as a listing vehicle to raise money to develop a telecommunications network in Malaysia following unsuccessful attempts to raise the money through a Malaysian company.
It was intended that the Malaysian company’s shareholders exchange their shareholdings in that company for new shares in Zavarco plc, which would then be listed on the Frankfurt Stock Exchange. As part of this, Mr Sidhu, one of the Malaysian company’s shareholders, would be allotted 840 million shares in Zavarco plc, each with a nominal value of €0.10.
Importantly, Zavarco plc would not receive cash in exchange for allotting the new shares. Rather, it would acquire the existing shares in the Malaysian company.
Under section 593 of the Companies Act 2006, an English public company cannot allot shares otherwise than for cash unless it obtains a valuation of the property it is receiving in return (a “non-cash valuation”). The consequence of contravening this rule is that the person to whom the shares are allotted must pay the full nominal value and any agreed share premium.
Under section 594, a public company does not need to obtain a valuation if the property it is receiving is shares under an arrangement put in place as part of a merger.
Zavarco plc did not obtain a non-cash valuation. Following the listing, its share price collapsed and it brought proceedings against Mr Sidhu, claiming there had been a breach of section 593 and that Mr Sidhu was required to pay a total of €84m in relation to the shares he had been allotted.
Mr Sidhu argued in response that the shares had been allotted as part of a merger arrangement and so there had been no need for a valuation.
The High Court disagreed and found that there had been no merger arrangement. Mr Sidhu was therefore required to pay €84m to Zavarco plc for the shares he had received.
For more information on that decision and on the requirement for a valuation, see our previous Corporate Law Update.
Mr Sidhu appealed to the Court of Appeal.
What did the Court of Appeal say?
The Court of Appeal dismissed Mr Sidhu’s appeal and held that he remained liable to pay for his shares. However, interestingly, the court came to its conclusion via a different line of reasoning.
The judges found that Mr Sidhu had agreed to subscribe for the 840 million shares when Zavarco plc was incorporated, rather than take them in an allotment after incorporation. This made a critical difference.
Under section 584 of the Companies Act 2006, shares taken by a subscriber on incorporation must be paid up in cash. Unlike under section 593, a subscriber is not able to subscribe for shares by transferring non-cash assets and there is no option to obtain a non-cash valuation. There is also no exception for merger arrangements, as there is under section 594 for a post-incorporation allotment.
Mr Sidhu argued that the words “Each subscriber … agrees to become a member of [Zavarco plc] and to take at least one share” in the company’s memorandum (the document that establishes it is being incorporated) meant that he had meant to subscribe for only one share, with the remaining 839,999,999 being allotted after incorporation.
The judges rejected that argument. The words “at least one share” indicated that Mr Sidhu had potentially agreed to take more than one share and the company’s statement of capital and initial shareholdings showed that he had taken 840,000,000 shares on incorporation.
The court also clarified that shares taken by a subscriber on incorporation are not “allotted” and so cannot fall within sections 593 and 594. Rather, a subscriber comes into ownership of shares on incorporation purely as a result of the company being registered.
What does this mean for me?
Although the Court of Appeal reached its conclusion via a different route, it highlights the same key point. When implementing a share-for-share exchange, it is important to document and structure the arrangement properly.
If looking to take advantage of the merger exception in section 594 and allot shares without payment in cash or an independent valuation, a public company and any participating shareholders must ensure that the details of the arrangement are clearly set out, each class of shares in the target company is dealt with distinctly, and that each shareholder in the target company participates on the same terms.
Moreover, the public company must ensure that the shares it issues as part of the share-for-share exchange are allotted after it has been incorporated, and not as part of the incorporation process.
In any event, whether a person subscribes for shares after incorporation, it is important to ensure payment is made in cash, or that an exemption applies, for the following reasons.
- A public company that allots shares in contravention of section 593 commits a criminal offence. In addition, any director of the company who is “in default” will also commit a criminal offence.
- Authorising an allotment of shares without a non-cash valuation is likely to amount to a breach by the directors of their statutory duties to the company.
- Without conducting a proper valuation of any non-cash assets, a company runs the risk of becoming undercapitalised and potentially unable to fulfil its debts.
- A person who subscribes for shares in contravention of section 584 or 593 will be liable to pay the company the aggregate nominal value of the shares, along with any agreed premium and interest.
- Anyone who subsequently acquires the shares will be jointly liable to compensate the company unless (broadly speaking) they were acting in good faith and are not aware of the contravention.