Corporate Law Update

• The court interprets a force majeure clause in the context of the Covid-19 pandemic
• The Takeover Panel consults on removing restrictions on acquiring shares through an anonymous order book
• The Takeover Panel clarifies when parties to a possible offer are required to consult it on a possible announcement
• The House of Commons publishes a report on tackling economic crime

Court interprets force majeure clause in the context of Covid-19

The High Court has held that a television company was entitled to terminate a contract for media rights to sporting fixtures when Covid-19 prevented the sporting association from scheduling the fixtures.

What happened?

European Professional Club Rugby v RDA Television LLP [2022] EWHC 50 (Comm) concerned a contract under which EPCR granted RDA media rights in relation to two European rugby union football competitions for four seasons from 2018 to 2022. The intention was that RDA would then sub-license the rights for certain fixtures to organisations that would broadcast them in different countries.

As is common in commercial arrangements, the contract contained a force majeure (FM) clause.

As is standard, the FM clause stated that neither party would be liable for any delay in performing, or failure to perform, their obligations under the contract to the extent it was caused by an FM event.

It also stated that, if the FM event “prevents, hinders or delays a party's performance of its obligations for a continuous period of more than 60 days, the party not affected by the [FM event]” could terminate the contract on 14 days' written notice.

Due to the Covid-19 pandemic, EPCR was unable to schedule certain competition fixtures for the 2019/2020 season before the season ended. RDA sent a notice to terminate the contract.

EPCR argued that RDA was not entitled to terminate the contract because the contract allowed a party to do that only if the party was “not affected by” the FM event. RDA had also been affected by the FM event (its sub-licensees were refusing to pay it) and so the right to terminate did not arise.

EPCR alleged that RDA’s real reason for serving a notice to terminate was to force EPCR into negotiations over pricing in the contract.

What did the court say?

The court disagreed with EPCR. The phrase “the party not affected by the [FM event]” had to be read alongside the other FM clauses in the contract. It referred to the party to whom the performance that had been hindered or delayed was owed. It did not prevent a party from being able to terminate the contract merely because that party was also affected in a general sense by the same FM event. That would be a “commercially absurd” outcome.

The judge said that RDA’s motive for terminating the contract was irrelevant. It may well have been that RDA wished to renegotiate its licence fee, but this did not deprive it of its right to terminate the contract where an FM event had occurred and had not been remedied.

What does this mean for me?

The decision is useful in many respects. First, it shows that the courts will take a common-sense and commercial approach to force majeure clauses. Often an FM event will, by its very nature, affect both or multiple parties to a contract, particularly if it has macroeconomic or widespread effect. It would have been odd if, in spite of that, the termination right in the contract had not been available.

The judge’s decision that any personal motivations RDA may have had were irrelevant is also useful. It would be difficult for contract parties to know, with certainty, what their rights as against each other are if the effect and exercise of those rights were subject to the commercial imperatives of each party at any given point in time.

However, the court did note that neither party had raised the question of whether RDA was under an implied duty to act in good faith when exercising its right to terminate the contract – the so-called “Braganza duty”. (For more information on the Braganza duty, see our previous Corporate Law Update.) The court was not able, therefore, to consider the possibility that RDA was under such a duty.

Historically, the courts have been reluctant to apply the Braganza duty to a right to terminate a commercial contract. However, this is nonetheless a reminder to contract parties to consider carefully whether they do indeed enjoy an unfettered right to terminate in these circumstances, or whether they will need to show that they have acted reasonably when deciding to terminate.

Panel consults on removing restriction on acquiring shares through anonymous order books

The Code Committee of the Takeover Panel has published consultation paper PCP 2022/1, in which it is proposing to amend the City Code on Takeovers and Mergers (the Code) to remove the restriction on a bidder acquiring securities in a target company through an anonymous order book system.

Rule 38.2 of the Code prohibits a bidder (in Code terminology, an “offeror”) from acquiring securities in the bid target (in Code terminology, the “offeree company”) from a trader (such as a market-maker or a broker) who is connected with someone advising the offeror during an offer period. Rule 38.1 prohibits such a connected trader from carrying out dealings to assist the offeror with its offer.

The purpose of these rules is to prevent an offeror from using a connected intermediary to build a stake in the offeree company while by-passing other restrictions in the Code.

This might happen, for example, if the trader acquires shares in the market at above the offer’s bid price, then on-sells them to the offeror at below that bid price (with the offeror compensating the trader in some other way). If permitted, this might allow an offeror to circumvent Rules 6.2(a) and 9.5(b) of the Code, which state that, if, during an active bid, an offeror acquires shares in the offeree company at above the offeror’s bid price, it must increase its bid price accordingly.

Rule 4.2(b) builds on Rule 38.2 by prohibiting an offeror from acquiring shares in the offeree company through an anonymous order book system, where a buyer and seller do not know each other’s identity, unless the offeror can establish that the seller is not a connected trader. This restriction has been in place formally since 2005 and before then in the form of a Panel practice statement.

The Code Committee has reviewed this restriction and decided that it is no longer necessary. It believes that historic breaches of Rule 4.2(b) have been inadvertent and have not caused any harm to shareholders in an offeree company.

In particular, the Committee notes that, to secure compliance with Rule 4.2(b), an offeror must ensure that all connected traders cease any activities that might result in securities being entered into the anonymous order book system. It is often impracticable and, in some cases, impermissible for a trader to do this. The Committee feels that the risks addressed by Rule 4.2(b) are now low compared with the cost and burden of complying with it.

As a result, it is proposing to:

• delete Rule 4.2(b) entirely; and
• clarify in Rule 38.2 that an offeror can acquire securities through an anonymous order book system provided neither the offeror nor the connected trader knows the other’s identity.

The Committee has asked for comments by Friday, 18 March 2022.

Panel clarifies requirement to notify possible offer following share price movement

The Takeover Panel has announced that it has amended its Practice Statement No 20 to clarify when it expects to be notified of a possible takeover offer when there is a material movement in the target’s share price. The Panel has published details of the amendments.

Under Rule 2.2 of the City Code on Takeovers and Mergers (the Code), there is a requirement to announce a possible takeover offer for a target company (in Code terminology, an “offeree company”) in certain circumstances where there is an “untoward movement” in the offeree company’s share price.

The requirement to make the announcement falls on the bidder (in Code terminology, the “offeror”) or the offeree company, normally depending on whether the offeror has already approached the offeree company. In some cases, the requirement can fall on a major shareholder in the offeree company.

The Panel will normally regard a share price movement as “untoward” if it is:

• material, which includes a movement of 10% or more above the lowest share price since the offeror first actively considered the possible offer; or
• abrupt, which will normally include where there is a price rise of 5% in the course of a single day.

In both cases, the parties to the possible offer should consult the Panel to ascertain whether an announcement is required.

The amendments to Practice Statement No 20 clarify that, if the Panel has already been informed of a possible offer before a material movement in the offeree company’s share price takes place, there is no need to inform the Panel again.

However, the parties will need to consult the Panel again if there is subsequently an abrupt movement in the offeree company’s share price.

The amendments are effect from 9 February 2022.

Other items

• House of Commons publishes committee report on tackling economic crime. The House of Commons Treasury Committee has published a report on economic crime. The report examines measures the Government has taken since publishing its Economic Crime Plan in 2019 and whether those measures have been effective. Among other things, the report notes that reforming Companies House is essential to tackle money laundering and economic crime and should not wait until 2025 (as currently planned). It also recommends raising fees for incorporating companies and limited liability partnerships to bring them more in line with international standards.