Supreme Court decision on penalty clauses

The Supreme Court decision on penalty clauses was handed down on 4 November 2015. The two cases being appealed were Cavendish Square Holding BV v Talal El Makdessi and ParkingEye v Beavis.

In the El Makdessi case, the Court of Appeal had held that clauses setting out the consequences of a breach of certain restrictive covenants by Mr Makdessi were unenforceable penalty clauses. The Supreme Court hasoverturned that decision, upholding the validity of the disputed clauses. The Supreme Court also dismissed the ParkingEye appeal, holding that the parking charge levied in this case was not an unenforceable penalty nor in breach of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR 1999).

The Supreme Court said that: 'the concepts of ‘deterrence’ and 'genuine pre-estimate of loss' are unhelpful. The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interestof the innocent party in the enforcement of the primary obligation'. However, the Supreme Court also stated that the penalty doctrine should not be abolished or restricted.

The full Supreme Court judgment can be found here. A press summary can be found here. To access our more detailed e-alerts on this topic – click here.

Not guilty verdict for City Link directors

The charges against the directors of City Link for failing to notify the Department for Business, Innovation and Skills of their intention to make City Link’s circa 2,500 employees redundant within the legal time frame of 90 days have been dismissed.

It was argued that, within an insolvency situation, it is rare for such notification to be given because highlighting a company’s financial predicament could have the detrimental effect of accelerating an insolvency which might otherwise be avoided.

The judge did, however, stress that this was a decision based on the facts of the case and was not meant to create a general principle for administrators - thus the issue of what directors should do in such difficult circumstances potentially remains. We will circulate a detailed review of the implications in next month's Corporate News.

Increases to minimum level of pension contributions delayed

In his Autumn Statement on 25 November, the Chancellor announced that increases to the minimum level of pension contributions required by auto-enrolment legislation will be delayed. Increases had been due to take effect from October 2017 and October 2018, but these will now each be delayed until the following April to align with the tax year.

FCA consultation on the implementation of the Market Abuse Regulation 

The Financial Conduct Authority (FCA) has published its proposals for the necessary changes to the FCA Handbook required to implement the EU Market Abuse Regulation (MAR) which will have direct effect from 3 July 2016.

In overview, it is proposed that the Handbook should provide guidance on, and "signposts" to, MAR where appropriate. However, the Handbook will not contain, and the FCA have stated that, after implementation, it should not be regarded as being a source of all relevant provisions. The Treasury will also need to amend the Financial Services and Markets Act 2000 (FSMA) and, in the same way, make sure that any provisions which are incompatible with MAR are removed.

The FCA consultation deals with two broad issues. First, it seeks responses on two aspects of MAR where there is national discretion on implementation, in particular:

  • the regime relating to the notification to the FCA of the decision by issuers to delay the public disclosure of inside information. The FCA's preference is for explanations of any delay in disclosure only to be provided on request as opposed to in all circumstances; and
  • the threshold above which transactions undertaken on their own account by persons discharging managerial responsibility (PDMR), and those closely associated with them, should be disclosed to the market. At present, Chapter 3 of the Disclosure Rules and Transparency Rules (DTR) has no such threshold whereas MAR allows a €5,000 threshold which may be increased to €20,000 if the FCA thinks it is justified and the European Securities and Markets Authority (ESMA)agrees. The FCA's current thinking is that the €5,000 threshold is the right one but is seeking feedback.

Second, the proposals address the "step-change" caused by the EU market abuse regime being governed by a Regulation as opposed to a Directive. In practice, the FCA states that this necessitates deleting provisions of the Handbook where MAR contains an equivalent provision. In turn, this means that, as from July 2016, the DTRs will be renamed the "Disclosure Guidance and Transparency Rules"; it will also require fundamental amendment to the current Code of Market Conduct, Chapters 2 and 3 of the DTRs (which deal with the discovery, control and dissemination of inside information and disclosure of dealings by persons discharging managerial responsibilities and their connected persons respectively) and the replacement of the Model Code of Share Dealing with guidance for issuers to use when framing their own procedures.

The FCA have requested feedback by 4 February 2016.

Home Member State notifications

As a result of the implementation of the Transparency Directive Amending Directive (TDAD) on 26 November 2015, issuers with securities on regulated markets need to notify the FCA of the identity of their home Member State in many cases as soon as possible to the extent that they have not already done so. For further information - click here – and for the FCA announcement – click here

Other TDAD-driven amendments to FSMA and the DTRs also came into force on 26 November. These changes extend:

  • the period of time within which listed companies must publish their half-yearly reports (from two to three months) (DTR 4.2.2R(2));
  • the scope of notifiable interests under DTR 5 (Vote Holder and Issuer Notification Rules), not least by removing the exemption from notification for stock lending agreements; and
  • the period of time which companies must make their annual and half-yearly reports available from five to 10 years (DTR 4.1.4R / DTR 4.2.2R(3)).

A new sanctions regime now also applies such that for the most serious breaches of the notification requirements in DTR 5, the FCA will be able to suspend voting rights attaching to the securities concerned. The current ability for the FCA to sanction directors knowingly concerned in any breach has also been extended.

Consultation on delaying disclosure of inside information 

The FCA has published a consultation paper (CP 15/38) on its proposal to amend its DTR guidance regarding the delay of disclosure of inside information. 

In particular, the FCA is proposing to delete the final sentence of DTR 2.5.5G which states that "other than in relation to impending developments or matters described in DTR 2.5.3R or DTR 2.5.5AR, there are unlikely to be other circumstances where delay would be justified". The reason for doing so is to clarify that issuers may have a legitimate reason to delay disclosure in circumstances other than the non-exhaustive examples listed in DTR 2.5.3R or the circumstances described in DTR 2.5.5AR.

Note that, as Article 17(11) of MAR requires ESMA to issue guidelines to create a non-exhaustive, indicative list of "legitimate interests" which may be used to justify a delay in disclosure, the FCA is not proposing to define "legitimate interests" at this stage. Having said that, the FCA does state that:

  • a commercial or PR-related preference to delay disclosure in circumstances where disclosure would not damage an issuer's interests, do not constitute legitimate interests justifying a delay in disclosure; and
  • a delay to protect the price of an issuer's securities does not constitute a legitimate interest as an issuer gains no direct benefit from the price of a security being maintained at a certain level.

The consultation closes on 20 February 2016.

UKLA publishes Primary Market Bulletin No 12 

The FCA has published its twelfth Primary Market Bulletin, in which it:

  • provides an update on EU developments;
  • announces the publication of changes to various procedural and technical notes in the UKLA Knowledge Base. These changes mainly replicate previous amendments to the FCA Handbook reflecting the reduced list of circulars that the FCA must pre-approve (LR 13.2.1R) and the revised regime relating to the treatment and announcement of "smaller" related party transactions (LR 11.1.10R). Further guidance has also been published for sponsors to assist them in identifying conflicts of interest;
  • launches a consultation on further changes to various procedural and technical notes in the UKLA Knowledge Base including in relation to notes dealing with the application of Listing Principle 2 (Dealing with the UKLA in an open and co-operative manner), and those dealing with periodic financial information and disclosure of positions held by issuers, investors and management.

The consultation closes on 11 January 2016.

FRC discussion paper on succession planning 

The Financial Reporting Council (FRC) has published a discussion paper on UK board succession planning, which focuses on board succession for executives and non-executives of those companies where the UK Corporate Governance Code applies and, in particular, on the following issues:

  • business strategy and culture;
  • the standing of and reporting by nomination committees;
  • the role of board evaluation in succession planning;
  • the pipeline of executives and non-executives;
  • how can a succession plan incorporate and deliver diversity objectives?; and
  • the role of institutional investors.

Comments are requested by 29 January 2016.

The Investment Association (IA) principles of remuneration 2015

The IA has published its 2015 principles of remuneration. These replace all previous versions. 

The principles set out the IA's views on the role of shareholders and the remuneration committee in relation to directors' remuneration, and on the appropriate structure of that remuneration. 

The main change from last year is that the IA expects long term incentive plan awards to have a total performance and holding period of at least five years. In addition, in a letterto remuneration committee chairmen, the IA set out their expectations in relation to:

  • basic salary increases;
  • the disclosure, and timing of the disclosure, of bonus targets;
  • notice periods in director service contracts;
  • executive pension arrangements;
  • recruitment arrangements and buyout awards.

BIS consultation on changes for LLPs and qualifying partnerships

BIS has published a consultation (which closes on 21 December 2015) on its proposals to change the accounting and audit requirements for LLPs. The most significant changes, if adopted, will:

BIS also proposes to introduce a micro-entity regime for qualifying partnerships, which would be available to qualifying partnerships under the Partnerships (Accounts) Regulations 2008 who meet the eligibility criteria.

It is intended that the regulations will be made by the summer of 2016, and that the new requirements for LLPs and qualifying partnerships will apply to financial years commencing on or after 1 January 2016.

  • increase thresholds used to determine the size of LLPs;
  • limit the number of mandatory notes required of small LLPs;
  • provide LLPs with the opportunity to use alternative layouts when preparing their P&L and balance sheet;
  • allow small LLPs to prepare an abridged balance sheet and P&L if approved by all members of an LLP; and
  • permit the use of the equity method in individual LLP statements.

FRC letter of advice to smaller listed and AIM companies on how to improve annual reports 

The FRC has published a letter of advice addressed to smaller listed and AIM companies detailing how to improve annual reports in areas which are of particular interest to investors. The advice has been given as a result of the FRC discussion paper on improving reporting by smaller listed and AIM companies published in June 2015.

FRC Lab report on disclosure of dividends

The FRC's Financial Reporting Lab has published a project report: "Disclosure of dividends - policy and practice", setting out the results of its discussions with investors on what they want to know about dividends in financial reports. It states that investors want information on:

Investors would like all disclosures on dividends to be brought together in one place, presenting a coherent message.

Amendment of Reports on Payments to Governments Regulations 

Regulations to amend the Reports on Payments to Governments Regulations 2014 have been published. The regulations rectify errors in the 2014 Regulations so as to ensure that, as required by Chapter 10 of the Accounting Directive, a UK parent undertaking has to include payments made by its foreign subsidiary undertakings (and not just those made by its UK subsidiary undertakings) in its consolidated report on payments to governments.

The changes also seek to ensure that partnerships and limited partnerships covered by the 2014 Regulations are treated in a similar way to companies as regards the publication on the Companies House register of their reports on payments to governments.

The regulations come into force on 18 December 2015.

  • why the company has selected its dividend policy;
  • what that policy means in practice;
  • the risks associated with the policy; and
  • what has been done in practice to deliver the policy.