Corporate Law Update
- Parliament seeks views on the UK’s venture capital industry
- The BVCA seeks views from general partners to help prepare guidance on climate risk reporting
- The FRC Lab publishes new guidance for companies on preparing supply chain disclosures
- The FCA updates the range of permitted taxonomies for electronic annual financial reports
- Court allows unfair prejudice application after more than 17 years
Parliament launches inquiry into the UK’s venture capital industry
The Treasury Committee has announced the launch of an inquiry into the state of the UK’s venture capital (VC) industry.
The Committee is a body of Members of Parliament appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HM Revenue & Customs and associated public bodies (including the Bank of England and the Financial Conduct Authority).
The inquiry will focus on the ability of firms to source scale-up financing, regulation around venture capital, the role of key bodies and how the industry can be strengthened.
In connection with its inquiry, the Committee has published an online public call for evidence. The Committee has asked for written evidence on the following areas.
- The current state of the UK’s VC industry, including opportunities and threats.
- The level of co-operation and integration between start-ups and established industry.
- The effectiveness of the current tax incentives (such as the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs)) in the VC market.
- The effectiveness of the regulatory regime(s) concerning venture capital.
- The role of other key bodies, including the British Business Bank and its programmes (such as the Future Fund and British Patient Capital) and the Advanced Research and Invention Agency, and how they can support the VC market.
- Proposals for strengthening the UK’s VC industry, such as opening new pools of capital for investment (including through pension funds and retail products), generating home-grown talent, and attracting international talent through the visa system.
- The effectiveness of any other government or public sector intervention in the VC industry and of government policy around venture capital in meeting wider government objectives.
The Committee has expressed particular interest in examples of international best practice and of potential change and/or policy proposals.
It has requested any submissions by 5.00 pm on Tuesday 7 June 2022.
BVCA seeks views to help prepare climate-risk reporting guidance
The British Private Equity and Venture Capital Association (BVCA) has announced that it, together with Initiative Climat International (iCI) and KPMG, intends to develop a practical guide for making climate-related financial disclosures.
The purpose of the guide will be to help private equity firms when making disclosures against the recommendations in the final report of the Taskforce on Climate-related Financial Disclosures (TCFD).
To this end, the three organisations have commissioned a survey to gather information on firms’ TCFD reporting behaviour.
iCI, which is running the survey, notes that stakeholders now expect companies and LLPs to conduct forward-looking TCFD-style analysis of the resilience of their business models and strategies, taking into account different climate-related scenarios, and to publicly report related metrics and targets.
This survey aims to assess firms’ current TCFD reporting activities and different challenges around the integration of TCFD recommendations into business and disclosure activities. The BVCA has encouraged general partners (GPs) to complete the survey.
The survey closes on Friday 13 May 2022.
FRC Lab publishes guidance on supply chain disclosure
The Financial Reporting Council’s Financial Reporting Lab (the FRC Lab) has published new guidance for companies when reporting on their supply chains.
The guidance notes that the Covid-19 pandemic and geopolitics have created significant strains on borders and trade and demonstrated how global supply chains can be disrupted. It also notes that evolving stakeholder values and the growing demand and regulation for sustainability reporting have increased the importance of understanding the impact of supply chains.
The Lab notes that investors are likely to look for information that helps them understand the following:
- the context of a company’s supply chain, including its size and scope, its nature and resilience, the extent to which sustainable procurement practices are embedded, and the impact on current and future operations, reputation and brand; and
- the impact of supply chain uncertainties, risks and opportunities on long-term value creation and the actions management are taking to address these.
The guidance then sets out some key questions and resources companies to which may refer when reporting. These include the following.
- The raw materials and goods that are critical to the company’s business model in the short and medium term and matters that may impact on the supply of those materials and goods.
- The nature and scope of the company’s digital infrastructure and supply chain, including any associated security risks, potential vulnerabilities and business continuity arrangements.
- How the company assesses its suppliers and owners, including how it takes into account potential legal and reputational risks and manages requirements in relation to modern slavery and other ESG issues.
FCA updates permitted taxonomies for ESEF reporting
The Financial Conduct Authority (FCA) has published Handbook Notice 98, in which it confirms that it has implemented the changes it proposed in Consultation Paper CP22/5. For more information on that consultation, see our previous Corporate Law Update.
The changes, which have been implemented by a new instrument, affect issuers that are required to submit their annual financial reports using the single electronic reporting format, more commonly known as “ESEF” and, following Brexit, now increasingly referred to in the UK as “UKSEF”.
Under the changes, from Tuesday, 3 May 2022, the FCA will now accept reports marked up using UKSEF only if they use version 2 (rather than version 1).
The changes also clarify that, for financial years beginning on or after 1 January 2021 but before 1 January 2022, issuers may mark their reports up using the ESEF 2021 taxonomy.
Court allows unfair prejudice application after more than 17 years
The Court of Appeal has allowed a shareholder in a dissolved company to bring a petition for unfair prejudice, despite a delay of over 17 years in initiating proceedings.
What happened?
Re Cherry Hill Skip Hire Ltd [2022] EWCA Civ 531 concerned a company established by a mother and son in 1982, who became its first shareholders and directors. However, there was a falling-out within the first three years which eventually culminated in the son being removed as a director in 1999.
In 2001, the son formally instructed solicitors, who requested copies of the company’s accounts from 1997 onwards, as well as other documentation. The solicitors indicated that, if the company did not respond adequately, the son would launch a petition in unfair prejudice (see box below).
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.
Importantly, it is the company’s conduct that is relevant. It is not possible to bring a petition in unfair prejudice based on the actions merely of other shareholders.
To launch a petition, a person must be a member of the company at the time of initiating legal proceedings. If the company in question has since been dissolved, the court will stay any proceedings until it has been restored to the register.
The court has wide discretion when deciding what relief to grant. The most common remedy is an order that the other shareholders buy out the petitioner’s shares. However, the court can impose other remedies, including ordering changes to a company’s constitution and imposing specific corporate governance arrangements.
Despite the solicitors sending repeated requests, the company never responded and the correspondence petered out.
Subsequently, the son launched a petition in unfair prejudice in July 2020 – over 17 years later. He asserted various factual allegations which were effectively all aspects of a single claim, namely that the company’s assets had been misapplied and the value of his shares in it had suffered as a result.
What did the court say?
The High Court initially rejected the son’s petition on the basis that it would be unfair to award him relief after he had waited so long before bringing his petition.
The judge held that, although there is no statutory limitation period for an unfair prejudice petition and the equitable doctrine of “laches” cannot apply (see box below), he ought to refuse relief on the grounds that the son had delayed in bringing legal proceedings.
Various restrictions exist which can prevent a person from bringing legal proceedings if they have waited too long.
The Limitation Act 1980 imposes time limits for bringing various specific types of claim. These include claims in tort (such as negligence, trespass or defamation), breach of contract and recovery of rent. The time limit depends on the claim in question and when the relevant events occurred.
If a person attempts to bring a claim after the applicable limitation period expires, the defendant can raise the Limitation Act 1980 as a complete defence.
Separately, a person may be prevented from obtaining an equitable remedy (such as an injunction, specific performance, restitution or an account of profits) by the doctrine of “laches”.
Laches (from the Old French word for “remissness”) applies where the person bringing the claim has failed to assert their rights in a timely manner and, as a result, it would be unfair to grant relief.
However, neither the Limitation Act 1980 nor the doctrine of laches applies to a petition in unfair petition. There is, therefore, no time limit per se for launching unfair prejudice proceedings. However, the court can decline to award a remedy for unfair prejudice if, as a result of any delay, it would be inequitable to do so.
However, the Court of Appeal disagreed.
It noted that the High Court judge had had to make his judgment based on limited information provided to him, whereas the Court of Appeal had had the benefit of a more extensive factual background.
The judges noted that the events the son complained about occurred both before and after his solicitors first wrote to the company (i.e. between 2001 and 2003). Even if it were appropriate to deny relief for events before then on the basis of a long delay, it was not a foregone conclusion that it should do so for events that took place after that time. The son could not have complained in 2003 of events that took place in subsequent years.
The court also felt that the son had not acquiesced in any subsequent unfairly prejudicial conduct. The judges distinguished between someone who knows they have been excluded from active involvement in a company yet fails to raise a complaint, and a passive shareholder who knows they are not receiving copies of the accounts or AGM notices but does not discover any impropriety until later.
The court noted that the son’s petition would need to be reformulated to properly encapsulate his claims, and that it would need to stay proceedings until the company could be restored. However, it was prepared to allow the unfair prejudice petition to proceed.
What does this mean for me?
Limitation periods are a familiar part of the English legal landscape and serve an important purpose. Commercial parties need certainty as to their potential exposure to claims. Time limits enable businesspeople to draw a line in the sand beyond which they need no longer look over their shoulder.
In particular, the six-year time limit for bringing claims in negligence or for breach of contract has become widely familiar and (although some types of claim attract longer or shorter limitation periods) serves as a useful reference point for commercial parties.
However, it is important to remember that not all types of claim become time-barred. A company that is aware of a potential petition in unfair prejudice would be wise not to attempt simply to “wait the claim out”, but rather to seek legal advice on its potential liability and courses of action.
That said, it is important to note that this decision was merely on an application to strike the claim out. The decision merely means that the matter can proceed to a full trial, and the trial judge may well decide that it would be inequitable to award the petitioner any relief based on his delay.
