• The Court of Appeal examines the test to be applied when deciding whether a material adverse change has occurred
• A single director of a company was not entitled to act alone in appointing an administrator
• Following its consultation, the FRC will proceed with limited changes to the UK Corporate Governance Code
• The Government sets out changes to exemptions from the UK’s financial promotions regime for high-net worth individuals and sophisticated investors
• The FCA provides guidance on ensuring cryptoasset promotions are fair, clear and not misleading
• The UK’s gender pay gap continues to decrease

Court of Appeal re-examines test for “material adverse change”

The Court of Appeal has re-assessed what amounts to a “material adverse change” (MAC), overturning a High Court judgment and finding that there had not been a MAC in connection with the acquisition of a business.

Decision Inc Holdings Proprietary Ltd v Garbett [2023] EWCA Civ 1284 concerned the sale by two individuals of the shares in an IT consulting company to a corporate buyer.

The sellers of the business had warranted that there had been no material adverse change in the target company’s turnover, financial position or prospects since the date of its last annual accounts.

When the business started making losses, the buyers brought proceedings for breach of the MAC warranty. The court held that there had been a MAC and the warranty had been breached.

In determining whether a MAC had occurred, the High Court examined the company’s expected prospects as at the date of the sale agreement and compared them with the company’s actual prospects as at that date. It did so by reference to the company’s EBITDA.

The Court of Appeal held that the High Court had, for various reasons, applied the wrong test. In particular, it should have compared the company’s actual prospects as at the date of the sale agreement against its actual prospects as at the accounts date. It also should not have simply equated “prospects” with EBITDA.

Normally, the Court of Appeal would have ordered a re-trial. However, it also concluded that the buyers’ claim notice was defective and out of time, and so the claim had no prospect of succeeding.

The case is a warning to draft any MAC provisions in a share or business sale agreement with care and attention.

Read more about the Court of Appeal’s decision on a material adverse change clause in our separate in-depth piece

Single director was not entitled to appoint administrator

The High Court has held that a single director of a company that had two directors was not entitled to act alone in appointing an administrator to the company.

The case involved a company with two directors, who had been in a personal relationship which had subsequently ended. One of them applied to the court to appoint an administrator to the company on the grounds that the company was unable, or was likely to become unable, to pay its debts.

Under the Insolvency Act 1986, an appointment to the court to appoint an administrator can be made by (among other persons) “directors of the company”.

The court held that this required a valid resolution of the company’s directors in accordance with its articles of association. (A company’s articles will normally allow its directors to take a decision by a majority vote in a board meeting or unanimously by informal means.)

In this case, the director had acted alone without following the company’s internal decision-making procedures. As such, she had no authority to make the application.

The decision is not surprising but it does add to an unclear area of the law. The decision is consistent with previous judgments of the court, which have held that a valid board resolution (or some other appropriate decision, such as a written resolution of the directors) is required to apply to court.

However, it stands at odds with other decisions, in which the court held that a sole remaining director of a company was entitled to apply to appoint an administrator in circumstances where the company’s articles required it to have more than one director.

The judge in this case managed to draw distinctions between the two lines of case law, but nonetheless an uneasy tension remains.

In practice, the safe approach must be that, where a company has more than one director, a single director should not act alone in attempting to appoint an administrator and should instead convene a board meeting to approve the appointment.

Access the High Court’s decision in Boura v LYHFL Ltd [2023] EWHC 2585 (Ch)

FRC to take forward limited reforms to Corporate Governance Code

The Financial Reporting Council (FRC) has announced that, following its consultation in June 2023, it will be taking forward only a handful of changes to the UK Corporate Governance Code.

The Code contains a set of governance principles aimed at larger listed companies with a listing in the United Kingdom. It operates on a “comply or explain” basis: companies apply the Code’s provisions, explaining why they have done so in a particular way, as well as any respects in which they have not applied them.

In its consultation, the FRC had proposed numerous changes to the Code, including some to reflect Government-proposed audit and corporate governance reforms that have now been pulled.

Given this, and having considered feedback from stakeholders, the FRC will be proceeding with only a small number of its original proposals. These are designed to:

• streamline the Code and remove duplication; and
• strengthen provisions on internal controls (although the announcement does not set out precisely what changes will be made).

The FRC will not be taking forward proposed changes relating to audit committee responsibility for ESG matters, nor modifications to existing Code provisions on diversity, overboarding and committee chair engagement with shareholders.

The FRC intends to publish an updated Code in January 2024.

Read the FRC’s announcement about forthcoming changes to the UK Corporate Governance Code

Read our original in-depth piece on the FRC’s consultation on changes to the UK Corporate Governance Code

Treasury to amend financial promotion exemptions for HNWs and sophisticated investors

HM Treasury has published details of amendments it proposes to make to the UK’s financial promotions regime, specifically to exemptions that relate to high-net worth individuals (HNWs) and sophisticated investors.

The proposals follow a consultation in December 2021. You can read our previous Corporate Law Update for more information on the proposed changes to financial promotion exemptions.

In summary, the changes are as follows:

• Increased thresholds for the HNW exemption. The thresholds for qualifying as a HNW will be raised to annual income of £170,000 or more, or net assets (excluding main home and pension assets) of £430,000 or more.
• Amended the criteria for the sophisticated investor exemption. A person will no longer qualify as a sophisticated investor merely because they have invested in more than one unlisted company in the previous two years. An individual can now qualify as a sophisticated investor if they have, in the preceding two years, been a director of a company with turnover of at least £1.6m (raised from £1m).
• Requirement to provide details in communications made using the exemptions. The communication will need to state (among other things) the full name of the person making it and provide an address (postal or email) to which the recipient can send any enquiries.
• Confirmation that the exemption applies. A recipient will be asked to confirm whether they are a HNW individual or a sophisticated investor by signing a prescribed form and indicating which criteria they satisfy.

The Treasury has published a draft instrument that would make the changes. If made, the changes would take effect from 31 January 2024.

Read the Treasury’s response to its consultation on amending financial promotion exemptions

Read the draft Financial Promotion (Amendment) (No. 2) Order 2023

FCA provides guidance on cryptoasset promotions

The Financial Conduct Authority (FCA) has published new guidance on how persons who make financial promotions of cryptoassets can ensure those promotions are fair, clear and not misleading.

Under UK law, a person cannot make a financial promotion relating to a “qualifying cryptoasset” unless that person has FCA authorisation to do so, or the promotion has been approved by an FCA-authorised person or is exempt.

Where a financial promotion is made, under FCA rules, the promotion must be “fair, clear and not misleading”. This applies not only to promotions of cryptoassets, but to any kind of financial promotion.

The new guidance does not change these existing rules, but rather provides guidance on how persons making or approving financial promotions can ensure they are fair, clear and not misleading.

Read the FCA’s new guidance on cryptoasset financial promotions

UK gender pay gap continues to decrease

The Office for National Statistics (ONS) has published data on the UK’s gender pay gap for 2022-2023.

The ONS reports that the gender pay gap has been declining slowly over time, falling by around 25% among full-time employees between 2013 and 2023. In April 2023, the pay gap stood at 7.7%.

The pay gap among higher earners is larger, but this difference has decreased in recent years. Indeed, the ONS reports that the gender pay gap has decreased across all major occupational groups between 2022 and 2023.

Employers in the UK with more than 250 employees are required to publish an annual gender pay gap report, setting out the disparity in pay between male and female employees. Reports must provide data as at a “snapshot date”, which, for private sector employers, is 5 April each year.

Data must include the percentage of men and women in each pay quarter, as well as mean and median average pay gaps. Employers must present data separately for hourly pay and bonuses.

Read the Office for National Statistics’ report on the UK’s gender pay gap in 2023