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19 May 2023

Corporate Law Update

In this week's update:

Government sets out proposed post-Brexit reforms to UK employment law

The Government has published its proposals to reforming the UK’s employment law framework following the UK’s withdrawal from the European Union (Brexit).

Its proposals are set out in a new policy paper, titled “Smarter regulation to grow the economy”. Separately, the Government has published a formal consultation on changes it proposes to make to EU employment law that has been incorporated into UK law following Brexit.

From the perspective of business mergers and acquisitions, the key proposals are as follows.

  • The Government intends to limit the duration of non-compete clauses in employment contracts to three months. It is not clear whether this will apply to “paid non-compete covenants”, where an employee undertakes not to compete in return for a payment.

    The changes would not affect restrictions on soliciting employees, customers or suppliers, nor non-competes in a purely commercial context (such as on the sale of a stake in a business). The position is unclear for non-competes that apply on the sale of a commercial stake but are linked to employment (such as in typical “leaver provisions”). We await more detail on this in due course.
  • The Government will consult on removing the requirement to elect employee representatives for consultations under the Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE). The changes would apply to businesses with fewer than 50 employees and transfers affecting less than 10 employees, allowing businesses to consult directly with affected employees.

For more information on the employment law aspects of the proposed changes, see this blog by our colleague, Tabitha Al-Mahdawie.

Takeover Panel consults on review of rule against frustrating action

The Takeover Panel is consulting on the parts of the Takeover Code that restrict a target company from taking “frustrating action” on an offer and impose restrictions on offer-related arrangements.

Broadly speaking, Rule 21.1 of the Takeover Code prohibits the board of a takeover target (in technical terms, an “offeree company”) from taking any action designed to defeat an offer for the target.

In particular, the rule prohibits so-called “poison pill” tactics, which are common (and permitted) in other jurisdictions. These include issuing more shares, granting new options, making material acquisitions or disposals and entering into non-routine contracts.

The Code provides certain (limited) exceptions to this restriction, including (most notably) where the target company’s shareholders approve the proposed frustrating action.

The Panel believes Rule 21.1 is functioning satisfactorily and so is not proposing to make any fundamental changes to it. However, it is proposing certain, less material changes, set out below.

  • Allowing a target company to issue more shares, provided that doing so is within the ordinary course of the target’s business (for example, under a share option scheme), and to purchase or redeem its own shares under a pre-existing programme with defined limits.
  • Allowing a target company to take other actions that are either not material or are within the ordinary course of the target’s business. This is designed to allow a target to take exceptional but routine actions, such as a debt refinancing or an exceptional small capital commitment.
  • Clarifying the period during which the restrictions on frustrating action apply. Broadly, this would begin when an approach is made to the target company and end at the end of the offer period (or, if there is no offer period, seven days after the target rejects the latest approach).
  • Imposing the same restrictions on an offeror where an offer amounts to a reverse takeover.
  • A new practice statement setting out how the Panel Executive would normally interpret and apply the amended Rule 21.1.

Separately, Rule 21.2 of the Takeover Code prohibits a target company or its directors from entering into certain “offer-related arrangements” with a bidder. These include (for example) undertakings to recommend an offer to the target’s shareholders, to assist a bidder with satisfying offer conditions, to notify a bidder of a competing offer and not to solicit competing offers.

The Panel believes Rule 21.2 is also functioning satisfactorily and is not consulting on any changes to it.

The Panel is also proposing to amend Rule 21.3 so as to require a target company to provide a competing offeror, on request, with all information it has provided, or subsequently provides, to another offeror (and not, as at present, only information specifically requested by the competing offeror).

Finally, the Panel is proposing to amend Rule 21.4 so that it applies not only to information already provided to external financiers, but also to information that is subsequently provided to them.

The Panel has asked for responses by Friday, 21 July 2023.

New regulations relax protection regime for Register of Overseas Entities

New regulations have been published that relax the regime for suppressing personal information of a registrable beneficial owner of an overseas entity in the UK’s Register of Overseas Entities (ROE).

The regulations follow the publication of draft legislation in March this year (see our previous Corporate Law Update).

Under the ROE regime, non-UK companies that hold certain interests in UK land are required to register with Companies House and provide details of their beneficial owners. In some cases, the entity must also provide details of its managing officers and of any trusts sitting within its ownership structure.

However, in some cases, a beneficial owner can apply to suppress their details from public view. This is currently possible only if the beneficial owner is at serious risk of violence or intimidation, and that risk arises as a result of either the overseas entity’s activities or an association between the overseas entity and the beneficial owner’s characteristics.

The regulations remove the need to show that the risk arises from the entity’s activities or an association with the beneficial owner, making it potentially easier for a beneficial owner to achieve suppression of their personal details.

The new regulations also:

  • set out the characteristics of a foreign limited partner for the purpose of determining who is the beneficial owner of an overseas company; and
  • introduce a new ability to apply to remove information from the register that (among other things) is factually inaccurate or was provided without the authority of the overseas entity.

The regulations come into effect on 1 June 2023.

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