This corporate update comments on some changes to the City Code on Takeovers and Mergers (the “City Code”) announced in July, and on a recent Supreme Court decision relating to the circumstances in which English Courts will pierce the corporate veil. It also reports on a consultation paper published by the UK Department of Business, Innovation and Skills (“BIS”) on “Transparency & Trust”, which could have far-reaching implications in relation to such matters as the disclosure of the beneficial ownership of companies and directors’ duties and responsibilities.


On 24 July 2013 the UK Takeover Panel (the “Panel”) announced changes to the City Code relating to profit forecasts, merger benefits statements (to be re-named “quantified financial benefits statements” (“QFBs”)) and the disclosure of material changes in information. The changes are intended to:

  • make the current requirements in relation to profit forecasts more proportionate and logical as well as more consistent with other legislation;
  • bring QFBs1 within the same regime as profit forecasts; and
  • require the prompt disclosure of any material changes to information published by a party to an offer and any material new information that comes to light in an offer period.

The changes follow a consultation process launched by the Panel in July 20122 and will come into force on 30 September 2013.

The principal changes are as follows:

  1. Profit forecasts

Current Rules:

Under the current rules profit forecasts3 included or referred to by an offeror or offeree in any document published with respect to an offer are subject to Rule 28 of the City Code. Rule 28 applies to such forecasts irrespective of when they are created (whether before or during the offer period4) or the financial periods to which they relate. Rule 28 requires, amongst other things, that all profit forecasts must be accompanied by the assumptions upon which they are based and must be reported on by the forecasting party’s reporting accountants and financial advisers (the “Advisers’ Report”)5.

New Rules:

Rule 28 has been replaced with a new Rule 28. This seeks to provide exemptions from the requirement for an Advisers’ Report.

Under the new Rule 28 a profit forecast referred to in any document published during the offer period by an offeror6 or offeree if created:

  • during the offer period will be subject to broadly the same reporting requirements as under the current rules, including the requirement for an Advisers’ Report;
  • before the offer period commenced but after an approach with regard to a possible offer has been made will need to be repeated and an Advisers’ Report included;
  • before the approach with regard to a possible offer will need to be repeated and include:
    • a statement by the directors confirming that it remains valid, the profit forecast has been properly compiled and the basis of accounting is consistent with the company’s accounting policies (a “Directors’ Confirmation”); or
    • a statement that the profit forecast is no longer valid (an “Invalidity Statement”); or
    • a new profit forecast for the relevant period and an Adviser’s Report.


The new Rule 28 includes the following additional exceptions to the requirement for an Advisers' Report, although it should be noted that these do not all apply in the case of management buy-outs and offers by controllers7:

  • Ordinary course profit forecasts: at the joint request of the offeror and the offeree, the Panel is likely to grant a dispensation in respect of a profit forecast published during the offer period which is made in the ordinary course of communications with shareholders8. A Directors' Confirmation will instead be required.
  • Profit forecasts for future financial periods: the Panel will usually grant dispensations to the requirement to provide an Advisers’ Report where the profit forecast relates to a financial period ending more than 15 months from the date on which it is first published. This is on the basis that the Panel considers offeree shareholders are less likely to rely on profit forecasts for long financial periods. Where a dispensation is granted a Directors’ Confirmation will be required, and, for a profit forecast first published before the offer period commenced, a Directors' Confirmation or an Invalidity Statement (as applicable).

If a profit forecast is published during the offer period for the first time, or a profit forecast is repeated for a future financial year, the document must include a corresponding profit forecast for the current financial year and each intervening financial year and Rule 28 will apply to each such profit forecast which relates to a period ending 15 months or less from the date on which it was first published. This means that unless another exception applies, an Advisers' Report will be required for those additional forecasts.

  • Profit Estimates: profits estimates9 which adhere to certain other regulatory requirements, e.g., preliminary statements of annual results which comply with the relevant provisions of the UKLA Rules or half-yearly financial reports which comply with the AIM Rules will be exempt.
  • Where the application of Rule 28 would be disproportionate or otherwise inappropriate: the Panel may grant dispensations where it considers these circumstances apply. Examples set out in the revised City Code include:
    • the profit forecast states only a maximum figure for the likely level of profits; or
    • the consideration securities will not represent a material proportion of the offeror’s enlarged share capital or, alternatively, a material proportion of the value of the offer.

Note 4(b) to new Rule 28.1 sets out the facts the Panel could consider when deciding whether to grant such a dispensation. These include whether the forecast is general or specific and whether the offer has been recommended or is subject to a competing offer or possible offer.

  1. Merger Benefit Statements

The changes to the City Code have brought QFBs within the regime governing profit forecasts set out above.

As with a profit forecast, QFBs must be properly compiled and must be prepared with due care and consideration and the statement and the assumptions upon which they are based are the responsibility of

the directors. A QFB must be understandable, reliable and should be capable of justification by comparison with outcomes in the form of historical information.

When a QFB is included in any document or announcement published during an offer period (or in an announcement that commences an offer period), the document or announcement must include (i) an Advisers' Report, (ii) the basis of belief supporting the statement, (iii) an analysis, explanation and quantification of the constituent elements, (iv) a base figure for any comparison drawn, (v) details of any disbenefits expected to arise and (vi) an indication of when the benefits would be expected to arise.

Cost saving measures published by the offeree prior to the offer are not subject to Rule 28 unless they are repeated by the offeree during the offer period.

  1. Material Changes in Information

Under the current rules any material change in information published in an offer document or a target board circular must be disclosed if a subsequent document is published.

Under the amended rules any material changes to previously published information, as well as any new material information which would have had to have been disclosed had it been known at the time that such earlier document was published, must be announced promptly, irrespective of whether any later document is, or is intended to be, published.

  1. Conclusions

The changes to the City Code materially reduce reporting requirements on profit forecasts in a number of circumstances. This includes communications made in the ordinary course, statements prepared prior to the offer period commencing, and long-range future profit statements. This is to be welcomed.

The abolition of the requirement to report on a profit forecast made before the offer period commences is helpful as the current rules deter companies from publishing forward-looking guidance on future expected profits. This may encourage some companies to give more forward-looking guidance.

The “ordinary course exemption” is also helpful as the costs of obtaining an Advisers’ Report may be disproportionate to the benefits of such reports to shareholders. However, the Panel will only grant such a dispensation if the other parties to the bid consent, and even if a dispensation is granted the directors are likely to be required to give details of the assumptions on which the profit forecast is based and to confirm that the basis of accounting used is consistent with that used in the company's accounting policies.

Finally the ability for the Panel to waive the rules on profit forecasts where the effects would be disproportionate or inappropriate will provide relief in situations where the obligation to provide an Advisers’ Report is unduly onerous.


It is a basic principle of corporate law that a company has a legal personality which is separate from that of its shareholders. However, the courts have held that in certain circumstances the so-called “corporate veil”, may be pierced, and the company's separate legal personality be disregarded, so as to deprive the company, or its controllers, of the benefit which would otherwise have been obtained by the company's separate legal personality. The circumstances in which this may be done are limited. In a recent family law case, Prest v Petrodel Resources Limited, the Supreme Court sought to define the circumstances in which the doctrine may apply.


In Prest v Petrodel, the question was whether the court had power to make an order transferring properties legally owned by companies owned by Mr. Prest to Mrs Prest following their divorce. The Supreme Court decided that there was no need to decide whether to pierce the corporate veil in this case because on the facts it could infer that the properties were held on resulting trust for Mr Prest, and so in effect were already beneficially owned by him. As a result, the court had the power to order their transfer to Mrs Prest. However, the Supreme Court went on to consider whether, and if so in what circumstances, the principle that a company is a separate legal entity with an identity distinct from that of its shareholders can be set aside. It concluded that the circumstances in which the corporate veil will be pierced are very limited.

The leading judgement was given by Lord Sumption. Having analysed the previous case law he concluded that most cases where a court had "looked through" a company to its owner fell within either the "concealment principle" or the "evasion principle".

In Lord Sumption’s view, the concealment principle would apply when a company has been used in a situation purely to conceal the identity of the real actors, and in those circumstances the court will look through the companies to the "real actors". The evasion principle would apply where there is a legal right against the controller of the company which is independent of the company's involvement, and where a company is interposed in order to defeat the right or frustrate the enforcement of the right against the controller. Lord Sumption declined to say that the corporate veil could never be pierced in other situations, because he considered there may be circumstances in which the power to pierce the corporate veil might be needed to prevent the law from being "disarmed in the face of abuse".

The other Judges broadly agreed with Lord Sumption's analysis, although two judges expressed some reservations as to whether all the past cases where the corporate veil had been pierced were in fact examples of the "evasion" or "concealment" principle. One Judge expressed doubts as to whether piercing the corporate veil could ever occur.

In addition to the "evasion" and "concealment" doctrines identified in this case the courts have recently underlined (e.g. Supreme Court in VTB Capital Plc v Nutritek International Corp) that other adequate remedies (e.g. in fraud) will often exist for plaintiffs against the shareholders of a company in circumstances where the courts will not pierce the corporate veil.


The legal principles behind the corporate veil cases have been difficult to reconcile despite the attempts of academics and judges to do so. This case reaffirms the limited circumstances in which the remedy of piercing the corporate veil is available, and brings to an end a line of family law cases that had argued that the corporate veil should be able to be pierced in a broader range of circumstances.


At its meeting in June 2013, the G8 endorsed principles regarding the transparency and ownership of companies which are consistent with the standards set out by the Financial Action Task Force (“FATF”).

The G8 is also committed to the publication of national action plans which will set out the action to be taken by each member state in this regard. The overall aim is to improve efforts to combat money laundering, tax evasion and avoidance, bribery, terrorist financing, evasion of financial sanctions and concealment of fraud. In June 2013, the UK Government published its action plan.

The UK action plan contains several points, which, if enacted, will affect UK company law. These include:

  • ensuring that companies are legally obliged to know who owns and controls them by requiring them to obtain and hold adequate, accurate and current information on their beneficial ownership;
  • requiring this information to be readily available to the authorities through a central registry of information relating to companies' beneficial ownership maintained by Companies House; and
  • a review of corporate transparency, including the use of bearer shares and nominee directors.

BIS recently published a consultation paper which consults on proposals for implementing the UK action plan. We comment on this below.

Enhanced transparency of UK company ownership

Central registry of beneficial ownership

It is proposed that a new central registry would hold details of the beneficial owners of all UK incorporated companies and LLPs, other than listed companies whose shares are traded on the main market of the London Stock Exchange (ownership of whose shares is already subject to other disclosure requirements). Disclosure would be required in respect of all individuals with a cumulative interest in more than 25 per cent. of the company's shares or voting rights.

The holdings of individuals acting in concert would be aggregated. Information on individuals who exercise control over the company would need to be included, regardless of whether or not they hold any shares.

To ensure that companies obtain and hold information about beneficial owners BIS is considering requiring companies to identify the beneficial owners of shares representing more than 25 per cent. of its voting shares, or which give the beneficial owner equivalent control over the company.

BIS also proposes to impose a corresponding requirement on beneficial owners to notify the company of their beneficial ownership based on the current disclosure regime which applies to individuals interested in 3 per cent. or more of the shares listed on the London Stock Exchange's main market.

Abolition of bearer shares

Under existing law, UK incorporated companies are permitted to issue bearer shares. Bearer shares can be transferred without changes needing to be made to the register of members. Currently, only a very small number (believed to be approximately 900) of UK companies have issued bearer shares. Although they can have a legitimate function, bearer shares can be open to abuse because of the lack of transparency they provide. International bodies such as FATF have identified the role of bearer shares in facilitating tax evasion and money laundering.

The Government proposes to prohibit the issue of new bearer shares on the basis that their use for legitimate purposes does not outweigh the advantages of preventing the potential for misuse. If this is done, there may be a transitional period during which the issue of new bearer shares is prohibited and existing bearer shares are phased out. The Government is seeking views on the impact of this change, and, particularly, on any measures needed to deal with bearer shares which remain unconverted at the end of the transitional period.

Nominee directors and corporate directors

There is some evidence from international organisations that nominee directors may play a role in facilitating money laundering and tax evasion. The Government is in favour of increased transparency. In the consultation paper, the Government acknowledges that there are legitimate uses for nominee directors, such as those who are directors of a subsidiary on behalf of the parent, but argues that there is a problem with "serial" nominees who are registered as directors of a number of companies in return for payment. Measures under consideration include:

  • requiring nominee directors to disclose their nominee status and the name of the underlying beneficial owner; and
  • making it an offence for a director to divest himself of power to run the company.

Although there are legitimate uses for corporate directorships (ie. companies that are directors), they can also hinder attempts to trace the beneficial ownership of companies. The Government considers there to be a strong case for banning their use and seeks views on this.

Increasing trust in UK business

The Government has also been examining methods of increasing confidence in UK business by ensuring that individuals responsible for major corporate failures are properly punished.

Clarifying responsibility of directors in key sectors

BIS is consulting on altering the duties of directors of large banks so that they would have a specific duty to place the safety and soundness of the company over the interests of shareholders. The objective would be to ensure that directors maintain a focus on what it is suggested should be their primary responsibility - to maintain bank stability. The BIS consultation paper discusses these issues.

Allowing sectoral regulators to disqualify directors

Although some sector specific regulators have the power to ban individuals from working in their particular sector, they do not currently have power to ban directors for breaches of UK company law. This means that individuals banned by a sector regulator are currently free to operate as directors of UK companies in other sectors. The consultation paper invites views on whether directors who are banned from senior positions in regulated sectors should also be automatically disqualified from acting as a director.

Factors to be taken into account in disqualification proceedings

In considering whether a director is unfit, the court must consider the matters set out in Schedule 1 to the Company Directors Disqualification Act 1986 (“CDDA”). These include such matters as misfeasance and breach of fiduciary or other duties. The Government is considering whether additional factors should be taken in account including:

  • material breaches of sectoral regulation;
  • the wider social impacts of the failure of the company;
  • the nature of creditors and the degree of loss they have suffered; and
  • the director's previous failures.

Additionally, BIS suggests that the CDDA could be amended so that a director could be disqualified for different periods in relation to different types of companies. Also under consideration is whether, if a person is associated with a given number of business failures there should be a presumption of unfitness leading to disqualification.

Improving financial redress for creditors

The consultation paper points out that, in contrast to some other jurisdictions, the UK's system focuses on disqualification of culpable directors, rather than on providing compensation to creditors and others who have suffered as a result of misconduct by directors. Options for change in this area that are canvassed include giving liquidators the right to sell or assign rights of action for fraudulent and wrongful trading. This would allow such claims to be sold to an individual creditor, a group of creditors or possibly to third parties, who would then take the risk and rewards of pursuing the action, while enabling the liquidator to recover something quickly for the main body of creditors. The consultation paper also considers whether the courts should be given new powers to make compensatory awards.

Time limit for disqualification proceedings

Disqualification proceedings must normally be commenced within two years of a corporate insolvency. The consultation paper considers whether this time period should be extended to five years, some other period, or whether there should be no time limit.

Extending overseas restrictions

UK law does not prevent a person who is disqualified overseas from becoming a director of a UK company, but BIS is proposing to use an existing power under Part 40 Companies Act 2006 to prevent persons disqualified overseas from becoming directors of UK companies. BIS also proposes amending CDDA to include a power to bring disqualification proceedings against a director of a UK company convicted of a criminal offence in relation to an overseas company, if this is in the public interest.


The introduction to the consultation paper recognises the tension between these new proposals, which would involve additional regulation and compliance burdens, and the Government's commitment to deregulation and reducing the burdens on business. A new consultation exercise on reducing administration and compliance costs for business is promised for the autumn. Some of the proposals, for instance, those relating to directors' disqualification, seem likely to receive widespread support. Others, including the proposed amendment to directors' duties in some sectors, are more controversial, and will no doubt provoke debate.