In this issue we look at recent cases on letters of intent and cross-border mergers, as well as proposed changes to the PSC regime and shielding liability for sole traders.
LETTERS OF INTENT - WHEN TERM SHEETS BECOME CONTRACTS
The High Court has held, in Arcadis Consulting (UK) Limited v AMEC (BSC) Limited  EWHC 2509 (TCC), that two companies had entered into a binding contract based on a letter of intent.
Arcadis and AMEC were negotiating the terms of a contract for the design of a car park. Various versions of the contract terms passed between them, but they never concluded a final written agreement. During the course of negotiations, AMEC sent a letter instructing Arcadis to begin work. The letter set out the key commercial items.
A dispute later arose over liability for defective concrete works. AMEC argued there was no contract. Arcadis claimed that a contract existed containing an implied term limiting Arcadis' liability for breach.
The court decided there was a contract between Arcadis and AMEC, but it was a basic one limited to the terms set out in the letter of instruction.
Unfortunately for Arcadis, the court found that the terms of the proposed liability cap were constantly amended and never finally agreed. As a result, the limit on liability never formed part of the contract, and so Arcadis' liability was uncapped.
In some ways, this is unsurprising. In the construction industry, parties often begin work on the basis of a letter of intent or limited instruction. The courts have repeatedly said that, in normal circumstances, arrangements evidenced this way can create a simple contract. This is often what the parties intend.
However, the case has instructive points and its principles may apply equally to other contexts, including acquisitions, joint ventures and equity investments. For example, the court reiterated that a letter of intent containing the words "subject to contract" is less likely to form a binding contract.
Even so, given that a term sheet or letter of intent can form the basis of a contract, it is critical that parties to negotiations include all key commercial items (e.g. limits on liability, indemnities, conditions to performance) in that document.
Parties should also think carefully about beginning work before concluding a final agreement. Otherwise, they run the risk of acting in a way that creates a contract by conduct along the lines of an incomplete term sheet, rather than the terms they have been diligently negotiating.
The result is that key commercial terms might never form part of the contract, and the courts will be reluctant to try and imply those terms into the contract once the parties have begun work.
GOVERNMENT CONSULTS ON EXTENDING PSC REGIME
The Department for Business, Energy and Industrial Strategy (BEIS) is consulting on changes to the regime for recording beneficial owners, or "persons with significant control" (PSCs). The Government is required to make these changes to implement the Fourth EU Money Laundering Directive (4MLD).
The consultation paper can be found here. The Government's key proposals are set out below. The consultation closes on 16 December 2016.
Extension to other legal entities
Currently, the PSC regime applies only to UK companies and LLPs, as well as European companies registered in the UK. These entities must keep a register of their PSCs, make that register available to the public, and file details of their PSCs once a year at Companies House.
4MLD effectively requires the Government to apply the PSC regime to all other legal entities.
BEIS is therefore proposing to extend the regime to (among other entities) open-ended investment companies (OEICs), investment companies with variable capital (ICVCs) and Scottish limited partnerships. These entities would need to record their PSCs in the same way companies currently do.
The regime would also be extended to building societies, charitable incorporated organisations (CIOs), co-operative societies, community benefit societies, credit unions and friendly societies. However, these entities would only need to record their PSCs if they in fact have one.
No more exemption for AIM companies
Currently, a company does not record its PSCs if it is subject to Rule 5 of the Disclosure Guidance and Transparency Rules Sourcebook (DTR 5). This applies to companies whose voting securities are admitted to a regulated market (such as the LSE Main Market) or a prescribed market (such as AIM).
BEIS feels this exemption goes beyond what 4MLD allows. It is therefore proposing to remove prescribed markets from the exemption. The effect would be that companies admitted to AIM and certain other markets that do not currently need to keep a register would become required to do so.
Filing information at Companies House
At the moment, entities must file details of their PSCs publicly at Companies House once a year. However, 4MLD requires the information in the public register to be "current". BEIS is therefore proposing to require entities to file details of any change to their PSCs within six months.
CROSS-BORDER MERGERS - TRUE "CROSS-BORDER" ELEMENT
The High Court has held, in Easynet Global Services Limited  EWHC 2681 (Ch), that it is not possible to introduce a dormant overseas company into a merger under the Companies (Cross-Border Mergers) Regulations 2007 (the "Regs") merely to bring the transaction within the regime.
The Regs create a regime for merging companies in two or more EEA states. This has advantages over traditional merger structures, especially when transferring liabilities and dissolving the transferor companies. This often makes cross-border mergers a candidate structure for group reorganisations.
In this case, Easynet wanted to merge various subsidiaries into a UK company. One of the subsidiaries was Dutch; the rest were UK companies. The Dutch subsidiary was dormant and had never traded.
The court held that the Dutch company had been included merely as a device to use the Regs. When read against the European law underpinning the Regs, this was not the proper purpose of the regime. The proposed transaction therefore fell wholly outside the regime set out in the Regs.
This is a good reminder that a merger under the Regs must have a genuine cross-border element. The Regs can certainly be useful in the right circumstances, but it is designed to be a truly international regime. Mergers that are, in effect, domestic will still need to adopt a more established mechanism.
SOLE ENTERPRISE WITH PROTECTED ASSET REGIME
The Office of Tax Simplification (OTS) has produced its final report on the proposed new SEPA regime. The report can be found here. Under the regime, unincorporated sole traders who register as a SEPA would be able to shield their primary residence from claims arising out of their business.
The OTS has concluded that the proposal is worth pursuing as a formal proposal.
HAMPTON-ALEXANDER REVIEW ON GENDER BALANCE
The Hampton-Alexander Review has produced its report on improving gender balance in FTSE leadership. The report can be found here. It makes several recommendations, including that FTSE 350 companies aim for at least 33 per cent women's representation on boards by 2020.