Corporate Law Update

• In a landmark decision which draws attention to the UK’s PSC regime, the highest EU court strikes down an EU law requiring details of the beneficial owners of legal entities to be freely accessible to the public
• The EU Foreign Subsidies Regulation is adopted, with significant implications for M&A transactions
• The FRC publishes its annual review of reporting against its Stewardship Code
• The new EU Corporate Sustainability Reporting Directive is officially adopted
• ESMA clarifies that investment firms providing direct electronic access are required to detect and report market abuse
• The High Court clarifies the procedure for challenging the name of a registered UK company

CJEU issues landmark ruling on transparency of corporate beneficial ownership

In a landmark decision, the Court of Justice of the European Union (the CJEU) has struck down a European Union law that requires details of the beneficial owners of legal entities to be made unconditionally accessible to the public.

The Fourth EU Money Laundering Directive (4MLD) requires EU Member States to establish central registers containing details of the beneficial owners and controllers of all legal entities established within their jurisdiction.

Originally, 4MLD allowed a member of the general public to access this information only if they could show a “legitimate interest” in seeking the information. In effect, this would be limited to showing an interest in potential money laundering or terrorist financing, activities 4MLD was designed to combat.

Subsequent amendments to 4MLD removed the need to show a “legitimate interest”, making information freely and unconditionally accessible.

The court has held that these amendments infringe rights to privacy and protection of personal data under the EU Charter of Fundamental Rights and declared them invalid, effectively reinstituting the “legitimate interest” test.

As a result, EU registers will now need to revert to the previous position, restricting access to the general public to situations where there is a “legitimate interest” in disclosure. We are aware that the beneficial ownership registers in Austria, Luxembourg and the Netherlands have already restricted access to their registers, and we can expect others to follow suit.

The judgment does not alter the position in the UK, which is no longer a member of the European Union or subject to EU law.

But it does raise interesting questions about the compatibility of unrestricted disclosure under the UK’s PSC regime (and, presumably, its new Register of Overseas Entities) with other aspects of UK law. It also places the UK government in a tricky position politically, as it continues to drive towards further transparency and encourage its Overseas Territories and the Crown Dependencies to do the same. The decision may well make that push more difficult.

For more information, you can read our in-depth analysis of the decision and its implications.

EU adopts new foreign subsidies control regime

The European Union has adopted its proposed new Foreign Subsidies Regulation.

The purpose of the Regulation is to address distortions in the EU’s internal market arising from subsidies granted by non-EU countries (which includes the UK). The Regulation gives the European Commission power to investigate and remedy distortions.

Among other things, the Regulation creates a new merger control regime that gives the Commission power to review and potentially block or unwind mergers and acquisitions and joint ventures (JVs).

Under the new regime, a merger, acquisition or JV will need to be notified to the Commission if:

• the merging parties, the acquired undertaking or the JV (the “concentration”) is or are established in the EU and, in the last financial year, generated aggregate turnover in the EU of at least EUR 500m; and
• all undertakings involved in the concentration were granted combined financial contributions from third countries of more than EUR 50m in the three financial years leading up to the notification.

The Commission will also be able to launch investigations on its own initiative in certain circumstances.

The new merger control regime bears a number of similarities to the existing EU merger control regime under the EU Merger Regulation (EUMR).

In particular, the new regime will feature “phase I” and “phase II” investigations and will be both mandatory (meaning notification is not optional if the thresholds apply) and suspensory (meaning it will be unlawful to complete an acquisition or JV before the Commission concludes its review).

However, the two regimes will be separate and target different theories of harm. It may well be that a proposed merger, acquisition or JV triggers notifications under both regimes. This will potentially add time and cost to transactions, as parties may need to prepare separate filings under each regime.

The Regulation also creates a separate regime for notifying public procurement procedures where a participant in the procedure has received foreign subsidies.

The Regulation is likely to enter into force in mid-2023 and will apply to transactions from Q3 2023. However, the Commission will also have a power to retrospectively investigate transactions that have completed within the five years before the Regulation comes into effect if they have distorted the EU’s internal market.

FRC publishes 2022 review of stewardship reporting

The Financial Reporting Council (FRC) has published a review of how signatories to its UK Stewardship Code reported against the Code during 2022.

The Stewardship Code sets out what the FRC considers best practice for institutional asset owners and asset managers when exercising their stewardship responsibilities. Like the FRC’s UK Corporate Governance Code, it operates on a “comply or explain” basis. Certain asset managers are required to report against the Code under the Financial Conduct Authority’s Conduct of Business Sourcebook. Other institutional investors can apply to become “signatories” to the Code and adopt it voluntarily.

The current version of the Code took effect from 1 January 2020. It expands substantially on previous versions, applying not only to asset owners, but also asset managers (including pension funds) and service providers, and covering all kinds of capital (both publicly traded and privately held).

The FRC noted improvements across various areas but feels there is still a need for greater emphasis on reporting activities and outcomes during the reporting period, using both quantitative and qualitative evidence. It intends to place greater emphasis on assessing this in 2023.

EU sustainability reporting regime adopted

The Council of the EU has adopted the proposed European Union Corporate Sustainability Reporting Directive (CSRD).

The CSRD mandates sustainability-related reporting for larger companies in the EU (including larger foreign issuers), increasing the availability and comparability of data available to asset managers and institutional investors, among other interested parties.

The CSRD will come into effect in stages, beginning in 2024 for companies already subject to the EU’s Non-Financial Reporting Directive (NFRD). From 2025, it will apply to large companies that are not currently subject to the NFRD and, from 2026, to listed small and medium-size enterprise (SMEs), small and non-complex credit institutions and captive insurance undertakings.

The CRSD does not apply in the UK but will affect UK companies with securities listed on an EU-regulated market. In addition, from 2028, it will also affect UK companies that generate net turnover in the EU above €150m and have a large subsidiary or branch, or a listed subsidiary, in the EU.

Separately, EFRAG (formerly, the European Financial Reporting Advisory Group) has submitted a first set of draft sustainability reporting standards for companies within the European Union (ESRS), which are designed to support corporate reporting under the CSRD.

​EFRAG is a private body, established with the encouragement of the European Commission, whose objective is to develop and promote European views in the field of corporate reporting.

ESMA updates its Q&A on the EU Market Abuse Regulation

The European Securities and Markets Authority (ESMA) has updated its Q&A on the European Union Market Abuse Regulation (EU MAR).

Specifically, ESMA has updated its guidance on which categories of person are required to detect and report market abuse under Article 16(2) of EU MAR.

Article 16(2) requires persons who are “professionally arranging or executing transactions” to put in place arrangements, systems and procedures to detect and report suspicious orders and transactions and report any suspected market manipulation or insider dealing to their national authority.

The revised Q&A clarify that the obligation also applies to investment firms providing direct electronic access (DEA providers) with respect to their DEA clients’ trading activity.

EU MAR does not apply in the UK. Following Brexit, the UK has adopted EU MAR in its domestic law in modified form (“UK MAR”), but ESMA’s Q&A on EU MAR have no status in UK law. However, they will be relevant to UK issuers with shares admitted to a securities exchange within the European Union and will, in any event, be useful guidance on the potential application of Article 16(2) of UK MAR.

Court clarifies mechanism for challenging company names

The High Court has clarified the grounds on which one company can challenge the name under which another company is registered in the UK.

Botanica Agriculture and Extraction Ltd v Botanica Ltd [2022] EWHC 2957 (Ch) concerned two UK companies with registered names containing the word “Botanica”.

Botanica Agriculture and Extraction Ltd (BAEL) was established under that name in November 2019. Botanica Ltd was incorporated in April 2020.

BAEL applied under section 69 of the Companies Act 2006 for an order that Botanica Ltd change its name on the grounds that BAEL had generated goodwill in the name “Botanica”.

The Company Names Tribunal rejected BAEL’s application on the basis that BAEL had not generated goodwill in the name “Botanica” by the time Botanica Ltd was incorporated.

The High Court subsequent overturned the Tribunal’s decision, noting that the Tribunal should have asked whether BAEL had acquired goodwill in the name by the time it made the application (not by the time Botanica Ltd was incorporated). It ordered the Tribunal to reconsider its decision.

You can read more about the decision, as well as useful points to think about when considering challenging a company name, in our in-depth piece.