Corporate Law Update: 11 - 17 May 2024

This week:

Court finds notice of warranty was valid and compliant after all

The Court of Appeal has held that a notice of warranty claim was valid and complied with the requirements of a share purchase agreement.

The High Court had originally held that the notice had misstated the nature of the buyer’s loss because it had referred to losses suffered by the company that had been acquired, rather than losses suffered by the buyer due to a drop in the value of the shares it had purchased.

However, the Court of Appeal held that this did not render the notice of claim invalid. The nature of the claim had been straightforward and consisted of the underlying facts that gave rise to the alleged breach of warranty.

The seller had been well aware of those facts, because it and the buyer had been in discussions about the issue for some time. Indeed, they had even amended the sale agreement to address it.

Interestingly, the court also made some broad comments suggesting that the buyer’s notice might have been valid even if it had contained less detail. The judges even felt that there had likely been no need for the buyer even to refer to the specific provisions of the sale agreement that had been breached.

The court’s reasoning makes sense in the context of the specific facts of the case, but it does raise questions for buyers and sellers about the sufficiency of notices of warranty or indemnity claims under a share or business sale agreement.

You can read more about the Court of Appeal’s decision in Drax v Scottish Power that a notice of warranty claim was valid after all in our separate in-depth piece.

Access the court’s decision in Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477 on whether a buyer’s notice of warranty claim complied with contractual requirements

Shareholder and sole director was unable to authorise his own breaches of duty

The High Court has held that a registered shareholder and sole director of a company was unable to authorise breaches of director duties he owed to the company under the Duomatic principle.

What happened?

Chohan v Ved [2024] EWHC 739 (Ch) concerned a company established by two individuals – a Mr Chohan and a Mr Ved – to hold a property under the terms of an unwritten joint venture.

Mr Ved and his wife each held 50% of the shares in the JV company. However, each held half of their shares on trust for Mr Chohan’s wife, making Mrs Chohan the beneficial owner of 50% of the company.

Under the arrangements, Mr Ved’s accountancy practice would occupy part of the property. The company therefore granted a lease of that part to Mr Ved in his capacity as a sole trader. Mr Ved and the company specifically contracted out of Part 2 of the Landlord and Tenant Act 1954 (the LTA 1954), removing Mr Ved’s right to security of tenure as a business tenant.

In due course, the parties wished to sub-let Mr Ved’s office space. To do so, they needed to extend Mr Ved’s lease so that its term was at least as long as the new sub-lease.

Before they could do so, the relationship between Mr Chohan and Mr Ved broke down. Mr Ved, as the company’s sole director, agreed an extension of his lease. He also made two changes in his favour:

  • The extended lease no longer excluded Part 2 of the LTA 1954, such that Mr Ved came to enjoy security of tenure (when previously he had not).
  • A tenant-only rolling break clause was introduced, allowing Mr Ved to terminate the lease at any time (again, a right that Mr Ved had previously not enjoyed).

What did the court say?

The court found that Mr Ved has preferred his own interests and acted outside his authority and the bounds of the joint venture. In particular, he had breached his duties under section 171 of the Companies Act 2006 (to use his powers for a proper purpose) and section 172 of that Act (to promote the success of the JV company).

Mr Ved claimed that his actions had been authorised in advance under the Duomatic principle.

Under that principle, if a decision would normally require a formal shareholder resolution but is instead taken informally and unconditionally by all the members of a company, it is as good as if it had been passed in a general meeting. The formalities of a meeting or formal resolution can be bypassed.

At common law, the members of a company can, by a simple majority of votes, authorise directors to take action that would otherwise amount to a breach of duty. If the directors hold shares, they are entitled, as a matter of law, to vote on the resolution (although it is often sensible for them to abstain).

Mr Ved said the Duomatic principle applied here because he and his wife, as the sole registered shareholders, had assented to the lease extension on the terms on which it was implemented.

The court disagreed for several reasons:

  • although the Duomatic principle operates informally, there must be some outward demonstration of assent. Here, there was nothing to show that Mr Ved had in fact considered and assented to his own potential breaches of duty before extending the lease;
  • there was also nothing to suggest that Mrs Ved had done so; and
  • moreover, case law had established that, where shares are held on trust on the understanding that the beneficial owner makes decisions in relation to them, the beneficial owner’s assent may be required for the Duomatic principle to apply. But there was no evidence that Mrs Chohan had assented to any potential breach of duty by Mr Ved.

Previous cases had also suggested that the Duomatic principle cannot be used to approve a transaction that is not made for an authorised purpose. The court, however, was equivocal on this, noting that there remains a degree of ambiguity in this area.

What is the upshot?

This case involved a rather particular set of circumstances, and it seems quite straightforward from the judgment that the individual in question had acted outside his powers.

More importantly, the case shows the limits of the Duomatic principle. A flexible feature of common law, the principle is normally invoked after the event when disputes arise, but, in some cases, it can be a handy means for shareholders to take action swiftly without the need to follow formalities.

However, as the decision shows, the Duomatic principle may not always be available. If proposing to invoke it – whether proactively or reactively – shareholders should consider certain things.

  • How will the shareholders demonstrate that they intend to assent (or did assent) to the decision in question? Are there any contemporaneous records, such as email exchanges?
  • Is Duomatic capable of applying? It cannot be used to authorise actions that are invalid in law (e.g. an unlawful dividend) or to skip a procedure that involves protections for third parties (e.g. on a capital reduction, a buy-back of shares or the removal of a director under legislation).
  • Is the company solvent? Various judgments have cast significant doubt on whether the principle can apply once a company enters the zone of insolvency.

Above all, one way or another, the courts will no doubt be reluctant to allow a director to utilise the principle to ratify their own self-dealing.

Access the High Court’s decision in Chohan v Ved [2024] EWHC 739 (Ch) that a sole director and shareholder was unable to authorise his own breaches of duty

Takeover Panel issues reminder of requirements for post-offer intentions

The Takeover Panel has published its seventh Panel Bulletin, reminding bidders of their obligations in relation to statements of intention in connection with the takeover of a UK company.

Under the UK’s Takeover Code, a bidder for a public company is required to set out its intentions in relation to the future of the target company’s business, employee and pension scheme(s). Those intentions must appear in the bidder’s firm offer announcement and in its offer document.

Panel Bulletin 7 states that the Panel expects that a bidder will almost always have developed specific intentions in relation to these matters. In the exceptional circumstance that a bidder has not formulated any intentions in this regard, it will be required to make a statement to that effect.

The bulletin also sets out some of the arguments the Panel often receives as to why a bidder should not be required to provide a fulsome statement of intentions, namely the following.

  • The bidder is not certain about expected synergies and so has not formulated any intentions.
  • Although the bidder envisages some headcount reduction, it does not need to disclose the detail of that intention or, if the envisaged reduction is not material, make any intention statement at all.
  • The bidder’s only intention is to conduct a strategic review and so it should formulate its intentions after concluding that review.
  • The bidder’s intention statements follow a “standard form” based on those made by other bidders.

The Panel will not accept these arguments.

Read Takeover Panel Bulletin 7 of post-offer intention statements (opens PDF)