Corporate Law Update

• The UK’s national security screening regime comes into force
• The court permits an English scheme of arrangement between an overseas company and its shareholders

UK’s national security screening regime commences

The UK’s new national security screening regime formally commenced on 4 January 2022.

The regime is set out in the National Security and Investment Act 2021 (the NSIA) and regulations made under that Act. It allows the UK Government to intervene in acquisitions and investments that pose a threat to the UK’s national security. The Government can “call in” an acquisition for investigation and, if it poses a threat to the UK’s national security, impose conditions or block it completely. If the transaction has already taken place, the Government has the power to “unwind” it.

In most cases, notifying the UK Government of an acquisition is voluntary. However, certain acquisitions of shares or voting rights in entities – termed “notifiable acquisitions” – trigger a mandatory notification requirement. Completing a notifiable acquisition without Government approval may result in civil and criminal sanctions, and the acquisition will be automatically void as a matter of UK law.

The new regime is very broad. It applies across all sectors of the economy. There is no minimum transaction value below which the regime does not apply. It applies to acquisitions of both entities and assets, including (in some cases) entities and assets located outside the UK. It also applies to purely “domestic” acquisitions that take place wholly within the UK. The Government’s call-in power applies to acquisitions that complete on or after 12 November 2020 (although the mandatory notification requirement does not apply to transactions that completed before 4 January 2022).

The Government has published a raft of guidance to assist businesses and their advisers with the new regime.

Separately, the Competition and Markets Authority (CMA) has updated its guidance on jurisdiction and procedure to reflect the changes made by the NSIA to the Enterprise Act 2002.

For more information on the regime and how it might affect an acquisition you have completed or are proposing to complete, speak to your Macfarlanes contact.

Court permits English scheme of arrangement between overseas company and its shareholders

The High Court has allowed a non-UK company to pursue a scheme of arrangement with its members under English law.

What happened?

In the matter of West African Gas Pipeline Company Ltd [2021] EWHC 3360 (Ch) concerned a company incorporated in Bermuda for the purpose of developing a gas pipeline.

The company wished to reorganise its funding structure to place itself on a more sustainable footing.

The company’s affairs were governed (in part) by an English-law shareholders’ agreement (an SHA) between it and its shareholders. Under the SHA, the company had to obtain the approval of all of its shareholders before it could take certain actions, including the proposed reorganisation.

However, one of the company’s shareholders – a company incorporated in Benin – which held 2% of the company’s voting rights, was unable to give its approval because, at the time, it had not validly appointed representatives to vote on its behalf.

The company therefore applied to the English court to propose a statutory scheme of arrangement under the Companies Act 2006 to its shareholders. The purpose of the scheme was to amend the SHA so as to introduce a new mechanism to approve company actions by obtaining 90% of shareholder votes in favour, provided no shareholder voted against.

At this point, the court merely had to decide whether to allow the company to proceed with the English scheme and put it to a vote of its shareholders.

A key question was whether the court had the power to permit the scheme of arrangement under English law between the non-UK company and its members (which, for a company limited by shares, will be its shareholders). A previous decision (Re Drax Holdings Ltd [2021] EWHC 2743 (Ch)) had suggested that, as a general rule, a scheme between a non-UK company and its members should be governed by the laws governing that company. In the words of the judge in that case, it was “almost impossible to envisage circumstances in which the English court could properly exercise jurisdiction in relation to a scheme of arrangement between a foreign company and its members”.

What did the court say?

The court permitted the scheme to proceed to a shareholder vote.

The judge acknowledged the decision in Re Drax Holdings but felt that, in this case, there was a sufficient connection between the proposed scheme and England. He noted that the SHA was governed by English law, and it was not clear whether an English-law contract could be amended using a Bermudian scheme of arrangement.

Two other factors also persuaded the court give permission to proceed with the scheme:

• The company was pursuing a parallel scheme in Bermuda.
• The English scheme was conditional on the Bermudian scheme proceeding, and vice versa.

What does this mean for me?

This is a potentially very useful decision for two reasons.

First, it confirms that, in the right circumstances, a non-UK company will be able to propose an English statutory scheme of arrangement under Companies Act 2006 to its members. This could be very useful to overseas companies, given the flexibility of UK schemes and the wealth of case law on them.

It is not immediately clear whether it would be possible to do this without launching similar, parallel proceedings in the non-UK company’s place of incorporation, but the court has at least now confirmed that the door is open.

Second, the decision highlights a useful way to deal with obtaining member approval where one or more members are unresponsive. It is not uncommon for a shareholders’ agreement, investment agreement or similar contract to require unanimous approval for certain matters. The problem of “gone-away” shareholders can present a frustrating impediment to obtaining approval.

It will not always be proportionate or cost-effective to use a scheme of arrangement to deal with this kind of problem. The approach in this case provides an interesting solution to dealing with the issue and is another tool in a company’s inventory.

It is worth noting that, on most schemes, the court does not need at the directions stage to consider whether it would ultimately have jurisdiction to sanction the scheme (assuming the members approve it and any conditions are satisfied). Normally, it will address this only at the sanction hearing (the court hearing to confirm the scheme). In addition, most directions hearings for schemes take place before an Insolvency and Companies Court judge, rather than a High Court judge.

However, in certain circumstances, it is appropriate for a High Court judge to preside over a directions hearing (and, preferably, for that same judge to sit at the sanction hearing). These circumstances are set out in paragraph 6 of the Schemes Practice Statement and include where there are any questions over the court’s jurisdictions to sanction the scheme.

If ultimate jurisdiction is in question, therefore, the company will need to raise it at the directions hearing and may be required to advertise the directions hearing to members or creditors who may be affected by the scheme.

The English scheme will now proceed to a vote of the members and (assuming it is approved) to a second “sanction hearing” before the court. We will report on that hearing if anything further of interest arises.