Corporate Law Update

• The Government publishes updated technical guidance on the UK’s register of overseas entities
• The Government publishes an independent review of its net zero transition approach
• The FCA is consulting on reforms to the UK’s structured digital reporting regime for listed companies
• The courts find that the goodwill in a business was not transferred because the sale agreement was not in writing

Updated guidance on the UK’s register of overseas entities

The Government has published an updated version of its technical guidance on the UK’s Register of Overseas Entities (the ROE).

The guidance follows recent technical changes to the statutory framework for the ROE, but it also includes some useful new guidance for overseas entities and verification agents.

The updates include the following.

• Further guidance on when an overseas government or government officer (such as an ambassador) or the Crown may be required to register as an overseas entity.
• More detailed guidance on when a person is likely to have significant influence or control over a trust (and, therefore, satisfy “condition 5”).
• More detail on the information that needs to be provided to Companies House, particularly in relation to any trusts that need to be reported. This new guidance will be particularly useful when considering whether there is a need to provide details of a beneficiary or protector of a trust.
• More detail on sanctions for failing to comply with various aspects of the ROE regime.
• New guidance (following recent legislative changes) for verification agents on when they can verify information based on documents or information that are not obtained from a source independent of the person being verified.

The Government has not provided a document showing the changes to the guidance. However, if you require any guidance on the changes, please speak to your Macfarlanes contact or contact Dominic Sedghi.

Government publishes independent review of net zero strategy

The Government has published the much-anticipated independent review of its approach to ensuring businesses take steps to approach and achieve “net zero”.

The review was led by Conservative Member of Parliament and former minister Chris Skidmore MP.

It runs to 340 pages and makes an impressive 129 recommendations (conveniently summarised in an appendix to the review), covering areas from financing transition initiatives to the electricity markets, as well as establishing new “Net Zero” parliamentary committees and decarbonisation agencies.

From a corporate law perspective, the review contains the following key recommendations.

• Sustainability reporting (#14). The Government should endorse and implement the International Sustainability Standards Board (ISSB) standards as soon as possible and move swiftly to formally adopt them for use in the UK for the 2024/2025 reporting cycle. You can read more about the proposed new ISSB standards in our previous Corporate Law Update.
• Transition plans (#15). The new net zero transition plan disclosure standards being developed by the UK’s Transition Plan Taskforce (TPT) should be mandatory for both listed and private companies. You can read more about the TPT and its proposed disclosure framework in our previous Corporate Law Update.
• Green and transition listings (#68). The Government should assess how the UK can become the most competitive financial centre for green and transition listings, capital raising and project financing. The review recommends reviewing the UK’s prospectus and listing regimes to encourage integrity and growth in the market for green finance instruments.

FCA consults on reforms to structured digital reporting

The Financial Conduct Authority (FCA) is consulting on reforms to the requirement for certain UK issuers to prepare their annual accounts and reports using structured digital reporting formats.

The current regime is set out in rule 4.1.14R of the FCA’s Disclosure Guidance and Transparency Rules (the DTR). It requires issuers whose securities are admitted to trading on a UK regulated market (such as the London Stock Exchange’s Main Market) to prepare their annual financial report in XHTML format.

Moreover, an issuer that prepares consolidated financial statements using IFRS must include iXBRL tagging for basic financial information using a recognised taxonomy.

These requirements are still housed substantively within inherited EU legislation. The FCA is not proposing to make any substantive changes to the structured reporting regime, but rather to relocate the requirements within the DTR and simplify the regulations.

The only change of substance would require issuers subject to the regime to use a “generally accepted taxonomy” when tagging IFRS consolidated annual financial statements.

This would include any taxonomy that is generally used in the UK for disclosures in regulated markets, is based on taxonomy standards published by the IFRS Foundation and is up to date. The FCA would publish a new technical note indicating current generally accepted taxonomies, which would include the most recent iteration of the European Union (ESEF) taxonomy (currently, ESEF 2022).

The FCA has asked for responses by 24 February 2023.

Legal title to goodwill did not transfer until set out in writing

The First-Tier Tribunal (FTT) has held that, when a business run as a partnership decided to incorporate as a company, legal title to the goodwill in the business did not transfer until the sale was set out in a written contract.

In 2 Green Smile Ltd and others v HMRC [2023] UKFTT 15 (TC), the partners in a dental practice business decided to incorporate the business as a company. To this end, the partners incorporated a new company on or around 1 December 2014 to run the business. However, they did not enter into a written contract for the transfer of the business from the partnership to the new company.

Subsequently, HM Revenue & Customs (HMRC) raised questions about amortisation which the company had claimed against goodwill in the business.

HMRC claimed that the goodwill in the business had transferred to the company not in December 2014, but rather in October 2015, when the partners entered into a written contract novating a contract from the partnership to the company.

The Tribunal had to decide when the company acquired the goodwill. Depending on when the goodwill was transferred, the level of amortisation debits the company could claim could be significantly less.

The Tribunal found that legal title to the goodwill was not transferred until October 2015, but that the company had acquired beneficial ownership of the goodwill in December 2014.

This was because the transfer of the business also involved the sale of real estate. Under the law of England and Wales, a contract for the sale of real estate must be in writing, contain all the contract terms and be signed by each of the parties.

Even though the goodwill and real estate were separate business assets, they were part of a single, indivisible agreement and could not be separated. Because the transfer of the real estate needed to be in writing, so did the transfer of any other assets. This was so, even though normally ownership of goodwill can be transferred through a purely oral contract.

Instead, there was a “de facto” transfer of the business – including the goodwill – in December 2014. The company became the economic (in legal terms, “beneficial”) owner of the goodwill from that point. However, the transfer of the goodwill was completed (in legal terms, “perfected”) in October 2015 when the contract in question was novated to the company.

Because the goodwill belonged beneficially to the company since December 2014, it had been entitled to claim the full extent of amortisation debits it had hoped for.

This is a rather particular set of circumstances, but it emphasises above all the need to take legal advice and properly document the transfer of a business – even a transfer between related persons – to ensure it is effective. Although the decision ultimately came out in favour of the company, a properly drafted sale agreement could have avoided litigation.