In This Issue:
Transparency – Public disclosure of a UK company’s ultimate owners and other measures....................................2
Interpretation of engagement letter – Payment of an abort fee payable in relation to an IPO.................................2
Private Equity – Amendments to Walker Guidelines................................................................................................................3
Joint Ventures – Relationship between shareholders’ agreement and articles of association................................3
Women on boards..................................................................................................................................................................................4
Change of LIBOR administrator – Impact on loan agreements............................................................................................5
New UK competition regime and regulator – The Competition and Markets Authority..............................................5
Anti-Bribery and Corruption – Recent enforcement cases....................................................................................................5
Introduction of Deferred Prosecution Agreements...................................................................................................................6
Gross negligence – A blurry market standard............................................................................................................................7
Key Contacts
Zoë Ashcroft
Partner, Corporate and
Finance Practice
+ 44 (0) 207 011 8725
Nicholas Usher
Partner, Corporate and
Finance Practice
+ 44 (0) 207 011 8734
2
Corporate and Business Law Update – London Calling
© 2014 Winston & Strawn London LLP
Corporate
Transparency – Public disclosure of a UK
company’s ultimate owners and other
measures
On 21 April 2014, the Department for Business, Innovation
& Skills (BIS) published the UK Government’s response to
its discussion paper of July 2013 entitled “Transparency
& Trust: Enhancing the Transparency of UK Company
Ownership and Increasing Trust in UK Business” and
confirmed its intentions to proceed with the majority of
the consultation proposals. Key proposals include:
Disclosure of beneficial ownership
΅΅ Companies will be required to maintain and keep open
for public inspection a register of beneficial owners.
This information will also need to be filed at Companies
House once a year. Companies will be given powers to
obtain the required information and beneficial owners
will also be obliged to disclose their interests in a
company to that company. The new regime will also
apply to companies limited by guarantee and limited
liability partnerships.
΅΅ A beneficial owner of a company will be any individual
who has an interest in more than 25% of the shares or
voting rights, or who otherwise exercises control over
the management. This includes joint holdings. Where
such a beneficial owner is a trust, it will usually be the
trustees whose identity must be disclosed, unless
someone else exercises effective control over the
trustʼs activities.
΅΅ Listed companies that comply with equivalent
disclosure rules under the Financial Conduct
Authority's Disclosure and Transparency Rules will be
exempt.
΅΅ A new criminal offence where companies or individuals
break the rules relating to the disclosure of beneficial
ownership.
Bearer shares
΅΅ A ban on the creation of new bearer shares and the
compulsory cancellation of existing bearer shares.
Corporate directors
΅΅ A ban on corporate directors in most cases. Following
feedback, the government intends to provide for
specific exemptions where corporate directors may
be of value and represent a low risk. Suggested
exemptions include group structures involving large
listed and private companies. A one-year transitional
period has been proposed.
Nominee directors
΅΅ Plans to increase awareness of directors' duties.
Although the government will not establish a register
of nominee directors, it intends to increase awareness
of directors' duties and consider if shadow directors
should be subject to directors' general statutory duties.
Directors disqualification
΅΅ The current regime for disqualification of directors will
be amended. There will be a broader list of factors to
be considered when determining if someone is unfit
to be a director, including culpability and materiality
of past conduct, track record, misconduct overseas,
and breach of sectoral regulation as well as general
directors' duties.
Many of the changes will require primary and secondary
legislation, which the government intends to introduce as
soon as Parliamentary time allows.
Interpretation of engagement letter – Payment
of an abort fee payable in relation to an IPO
In Daniel Stewart & Company Plc v Environment Waste
Control Plc, a waste management company, Environmental
Waste, engaged an investment bank, Daniel Stewart, to
act as its nominated advisor on a proposed IPO.
Following a disagreement between Daniel Stewart and
Environmental Waste’s main shareholder as to the value of
Environmental Waste, Environmental Waste decided not
to proceed with the IPO. Daniel Stewart claimed payment
of the abort fee contemplated for in its engagement letter
with Environmental Waste. The relevant clause provided:
“Fees will be payable in the event that [Environmental
Waste] aborts the transaction for reasons unconnected
with [Daniel Stewart] or its performance prior to
completion of the marketing and the book build. In these
circumstances, in addition to the initial fee, the fees
payable will be £150,000 [plus VAT]. Without prejudice to
the generality of the foregoing, if upon completion of the
marketing and book build process both parties agree that
admission cannot or should not proceed, no abort fee will
be payable.”
3
Corporate and Business Law Update – London Calling
© 2014 Winston & Strawn London LLP
Environmental Waste claimed that no abort fee was
payable on the basis that a term should be implied into the
engagement letter to the effect that Daniel Stewart must
act reasonably in agreeing that the transaction should not
proceed, and that Daniel Stewart had acted unreasonably
in advising Environmental Waste to proceed with the
transaction at a lower valuation.
Decision
The Court disagreed and pointed out that for a term to
be implied into a contract, the court needs to be satisfied
that both parties, acting reasonably, would have agreed
to the particular term had it been suggested to them. It
said that the courts will be reluctant to imply a term where
the parties have entered into a carefully drafted written
contract containing detailed terms agreed upon between
them. Where a term is not strictly necessary, it is unlikely
to be implied. The clause was clearly drafted, and the fact
that to imply the terms proposed would cause uncertainty
meant that it would be inappropriate to imply it.
The Court found that the engagement letter required
Daniel Stewart to act in good faith and not capriciously.
This provided Environmental Waste with the necessary
protection under the clause and made good business
sense without the need for an additional term to be
implied. The judge pointed out that there was no
obligation on Daniel Stewart to act reasonably in relation
to the decision as to whether the IPO should proceed or
not. Had the parties required this obligation to be subject
to a requirement for reasonableness, this should have
been stated expressly in the relevant clause.
Private Equity – Consultation on amendments
to Walker Guidelines
In early 2007 – amidst a febrile political climate – the
British private equity industry asked Sir David Walker, City
grandee and now Chairman of Barclays Bank, to look at
transparency and disclosure in the industry, and to make
recommendations to improve it. The Walker Guidelines –
a set of voluntary standards aimed at firms doing larger
buyouts in the UK – were finalised and published in
November 2007, and a semi-independent body (known
as The Guidelines Monitoring Group, or GMG) has been
overseeing take-up of the Guidelines ever since.
Seven years later, it is clear that the Guidelines have
become much more than a short-lived reaction to a political
and media storm, largely because of the determination
of the GMG. In April it issued a consultation on changes
to the Walker Guidelines which, if adopted, will require
enhanced disclosures for affected portfolio companies in
line with additional requirements for quoted companies
which came into effect last year.
The main change that would affect Walker portfolio
companies is the requirement to give information on
their business model and on gender diversity and human
rights matters. There will also be a requirement for
portfolio companies to include a specific "statement of
conformity" in their annual reports confirming compliance
(or explaining any non-compliance) with the Guidelines.
The new Guidelines will also specifically confirm a
requirement to set out the Company's strategy, although
the GMG says that this is already implicit in the existing
rules.
However, new requirements for quoted companies to
disclose information on greenhouse gas emissions in
their directors' reports will not be incorporated into the
Guidelines. The GMG has concluded that this is not
necessary as their focus is on a company's activities and
factors affecting their future development. In addition,
companies currently outside the scope of the new
pan-European Alternative Investment Fund Managers
Directive will not be expected to comply with any of the
additional reporting requirements that it requires. Nor
has the GMG opted to lower the thresholds for Walker
compliance, as contemplated in last year's review of the
Guidelines.
Instead of tightening the rules in these ways, the GMG
has renewed its commitment to ensure that portfolio
companies consistently report to standards reflecting
good practice (and not just formal requirements) by FTSE
350 companies. To this end, it intends to monitor reporting
by such companies for a year before implementing the
amended Guidelines, by which time it expects reporting
themes and best practice to be better established. The
amended Guidelines will therefore apply to accounting
periods ending on or after 30 September 2014.
Joint Ventures – Relationship between
shareholders’ agreement and articles of
association
A recent Court of Appeal decision highlights the need
to ensure proper interaction between a shareholders’
agreement and the related articles of association.
Two director‑shareholders in a company agreed in a
shareholders’ agreement to vote to appoint and continue
reappointing a particular individual as a director. The
4
Corporate and Business Law Update – London Calling
© 2014 Winston & Strawn London LLP
shareholders’ agreement did not expressly prevent them
and other directors from removing this particular director.
Other relevant provisions were:
΅΅ A further assurance clause in the SHA which obliged
them to “take such other actions as may reasonably be
required to give effect” to the SHA.
΅΅ A provision in the articles of association which allowed
a director to be removed by notice from two or more
other directors.
The particular director was dismissed by notice under
the articles of association. The Court of Appeal decided
that the shareholders’ agreement, including the further
assurance clause, did not prevent this and refused to
imply a term to restrict it.
Key lessons
The case highlights the importance of ensuring that
shareholders’ agreement and the related articles
of association interact properly and do not contain
contradictory provisions. The Court of Appeal also
pointed out that, whilst shareholders in a UK company
can vote in their own interests, directors must abide by
statutory duties, and it would be hard to imply a term
made by parties in one capacity which fetters exercise of
their powers in another capacity. The Court of Appeal also
took into account the position of independent directors
and future directors who do not know the shareholders’
agreement. In deciding whether or not to take up office
they were entitled to assume that the director‑removal
provisions in the public articles of association were a
self‑standing indication of what their powers of removal
would be.
Women on boards
The Davies Review Annual Report 2014 shows that
women now account for approximately 21% of overall
board directorships in the FTSE 100 - up from 12.5% in
2011. There now remain only two all-male boards in the
FTSE 100.
Lord Davies reports a "growing recognition" of the social
and economic benefits of having more women on boards.
Gender equality in business allows companies to:
΅΅ “improve performance at Board and business
levels through input and challenge from a range of
perspectives”;
΅΅ “access and attract talent from the widest pool
available”;
΅΅ “be more responsive to the market by aligning with a
diverse customer base, many of whom are women”;
and
΅΅ “achieve better corporate governances, increase
innovation and avoid the risks of ‘group think’”.
Targets
In 2011 Lord Davies recommended that FTSE 100 boards
should aim for a minimum 25% female representation
on their boards by 2015, which in practical terms means
that fewer than 50 women need to be appointed to
FTSE 100 boards in the next 18 months for the UK to
meet this milestone. Such an achievement would double
the percentage of women on boards since 2011 and is,
according to Lord Davies, a target which "can clearly be
achieved".
Possible Legislation
Lord Davies points out that the UK's voluntary, businessled
approach is under intense scrutiny from European
partners, regulators, investors, and other stakeholders,
while countries such as Germany have already chosen the
legislative route. German companies are required to allot
30 percent of their non-executive board seats to women
from 2016 or leave the positions unfilled. Meanwhile
Norway, a non-EU member, imposed a 40 percent quota in
2003 – a target reached in 2009. Norwegian companies
can be liquidated if they fail to reach the target.
The European Parliament voted in favour of legal quotas
last November, but the European Council reached
deadlock on the matter. Failure by the UK to achieve
the voluntary targets would raise the prospect of legal
intervention by Government or from the European Union.
With the spotlight on British business, Lord Davies asks
the UK to prove that it can deliver real change in this area
without legislative measures.
5
Corporate and Business Law Update – London Calling
© 2014 Winston & Strawn London LLP
Finance
Change of LIBOR administrator – impact on
loan agreements
On 1 February 2014, ICE Benchmark Administration
Limited (ICE) replaced the British Bankers’ Association
(BBA) as the LIBOR administrator, the body responsible for
compiling and distributing LIBOR rates. This implements
one of the recommendations of the “Wheatley Review”
of the LIBOR.
Draft loan agreements currently under negotiation: In
LMA style documents, the “Screen Rate” definition should
be amended by replacing the reference to the BBA as
LIBOR administrator with a reference to ICE. Any other
reference to the BBA should be reviewed and amended
as appropriate.
Loan agreements that have already been entered into:
In our view, the change of the LIBOR administration should
not affect English law loan agreements that have already
been entered into, which incorporate the LMA’s “LIBOR”
and “Screen Rate” definitions. For such agreements, we
believe that an English court would be likely to interpret
the reference to BBA LIBOR as a reference to LIBOR
as administered by ICE. The analysis for reaching this
conclusion depends on whether the current “LIBOR”
and “Screen Rate” definitions or the previous pre-April
2013 versions of these definitions have been used in the
loan agreement. However, if loan agreements contain
bespoke provisions (not based on the LMA “LIBOR” or
“Screen Rate” definitions), the impact of the new LIBOR
administrator will need to be considered on a case-bycase
basis.
Competition and Anti-Trust
New UK competition regime and regulator –
The Competition and Markets Authority
On 1 April 2014 the UK’s new unified competition regulator,
the Competition and Markets Authority (CMA), became
fully operational replacing the previous competition
regulators, the Office of Fair Trading (OFT) and the
Competition Commission (CC). The Government’s aim
in creating a single regulator was to improve the UK
competition enforcement track record, inter alia increasing
coherence and designing faster and less burdensome
processes for businesses.
Within the CMA’s structure and its decision making
process the current two-phase institutional divide has
to some extent been retained. The CMA Board will be
responsible for overall strategy, performance, rules and
guidance, and will be in charge of Phase 1 merger and
market decisions (which were dealt with by the OFT). The
CMA panel includes independent experts (equivalent to
the current CC) and is available for selection to undertake
Phase 2 mergers, market investigations, and certain
regulatory appeals (which were dealt with by the CC).
The new CMA has recently published its prioritisation
principles and 2014 / 2015 Annual Plan. The CMA is
expected to prioritise its work according to the impact
(e.g., direct/indirect effect on consumer welfare), strategic
significance (e.g., whether the CMA is best placed to
act), risks (the likelihood of a successful outcome), and
resources (proportionality vis-à-vis expected benefits).
According to the 2014 / 2015 Annual Plan, the £ 66.2
million budget of the CMA is expected to generate at
least £ 660 million of direct benefits for UK consumers.
Potential targets of enforcement in the next couple of
years include regulated sectors (in collaboration with the
sector regulators), emerging sectors and business models
(including online models), and public services.
The creation of the new CMA is one of a number of
changes that have been made to the UK competition
regime by the Enterprise and Regulatory Reform Act
2013, all of which came into force on 1 April 2014. The
most significant reforms are the elimination of the
“dishonesty requirement” to secure a criminal conviction
for individuals involved in a cartel, new deadlines and
information gathering and enforcement powers in merger
reviews, and compulsory interviews of current and former
employees in anticompetitive agreements and abuse of
dominance cases.
Corporate Crime
Anti-Bribery and Corruption – Recent
enforcement cases
In the UK, there has been an increase in the profile of
anti-bribery and corruption (“ABC”) enforcement efforts
with a further regulatory case involving ABC issues, the
emergence of further industry-led guidance and the
announcement of the SFO’s first significant investigation.
΅΅ The Financial Conduct Authority (“FCA”) issued a
Final Notice on 19 March 2014, fining Besso Limited
(“Besso”) £315,000 for failing to take reasonable care to
establish and maintain effective systems and controls
6
Corporate and Business Law Update – London Calling
© 2014 Winston & Strawn London LLP
for countering the risks of bribery and corruption.
The decision provided a useful recent example of the
approach expected of regulated firms, the previous
notable examples of Aon Limited (January 2009) and
Willis Limited (July 2011) being a little dated, and a
reinforcement of the matters identified in the case of
JLT Speciality Limited (December 2013).
΅΅ In a useful summary of the standards expected, the
FCA determined that Besso (i) had limited bribery
and corruption policies and procedures in place; (ii)
failed to conduct an adequate risk assessment of third
parties before entering into business relationships;
(iii) failed to keep its relationships with third parties
under review; (iv) did not adequately monitor its staff to
ensure that sufficient due diligence has been carried
out; and (v) failed to keep adequate records of the
anti-bribery and corruption measures taken on its third
party account files.
΅΅ Regulatory guidance has been revamped by the
British Bankers’ Association (“BBA”), issuing updated
anti-bribery and corruption guidance. The document
provides the banking sector with guidance on taking
necessary actions in order to meet the legal and
regulatory requirements for preventing bribery and
corruption, including the requirements of the Bribery
Act 2010. The BBA’s updated guidance includes
references to governance (through policy and
procedure), risk assessment, third party due diligence,
and recording and reporting. Of interest is the
resonance of the BBA’s guidance with those failings
identified by the FCA in their enforcement against
Besso (described above).
΅΅ On 27 May 2014, the Serious Fraud Office (“SFO”)
announced the opening of its first major ABC
investigation, into the commercial practices of
GlaxoSmithKline (“GSK”) and its subsidiaries. The
investigation has parallels with investigations in other
countries, notably those on-going in China. The
SFO’s announcement was interesting in its comment
regarding whistleblowers (i.e. “Whistleblowers are
valuable sources of information to the SFO in its cases.
We welcome approaches from anyone with inside
information on all our cases including this one - we
can be contacted through our secure and confidential
reporting channel, which can be accessed via the
SFO website.”). This approach mirrors the success in
US investigations using whistleblower sources. The
availability of Deferred Prosecution Agreements (see
below) is expected to increase ABC enforcement
activity further.
Introduction of Deferred Prosecution
Agreements
On 24 February 2014, Deferred Prosecution Agreements
(“DPAs”) formally came into force in the UK. In short, under
a DPA a prosecutor charges a company with a criminal
offence, but proceedings are suspended on terms agreed
by the prosecutor and the defendant organisation and
sanctioned by the Courts. So long as the conditions are
met, the prosecution will not be pursued.
The SFO (the prosecuting body most likely to use the
new ‘tool’) has welcomed their arrival. The Director of
the SFO, David Green CB QC stated that “DPAs provide
an alternative response to some corporate criminality, a
response which avoids that collateral damage. The route
to a DPA should also be cheaper, quicker and more certain
for all parties”. The use of DPAs is confined to certain
types of offences, notably cases of fraud, bribery and
other economic crime, subject to the DPA being “in the
interests of justice, reasonable, fair and proportionate”.
There are three stages to the DPA process, (i) the
negotiation period; (ii) a private preliminary hearing; and
(iii) a final hearing (possibly private but usually public). In
short, the organisation will need to accept a number of
conditions (which are likely to be negotiated at length),
such as paying a financial penalty, paying compensation,
and co-operating with future prosecutions of individuals. If
the company does not meet the conditions, the prosecutor
may apply to Court to resurrect the proceedings.
In an indication of the level of cooperation expected
from those organisations seeking DPAs, the Director
has commented that adequate cooperation would
include “a waiver of privilege, where necessary. This
applies particularly to privilege which is often claimed,
dubiously, over accounts given by witnesses in internal
investigations. Of course waiver cannot be compelled,
but waiver of privilege where necessary would be an
obvious sign of cooperation.” This provides a useful
(and potentially worrying) first indication of the Director’s
approach now that DPAs are ‘in play’ for the SFO.
While clearly welcomed by the SFO, the Director also
warned that “Prosecution remains an option and the
prosecution of individuals remains likely”.
7
Corporate and Business Law Update – London Calling
© 2014 Winston & Strawn London LLP
Legal Refresher
Gross negligence – A blurry market standard
The term gross negligence is commonly used in English
law agreements to denote situations in which a party will
not benefit from an exclusion clause nor be indemnified
for his conduct. Unlike in some civil law systems, English
contract law does not prohibit excluding liability for gross
negligence and given the prevalence of such exclusions,
in all likelihood, advisors to both parties would ordinarily
concede that the gross negligence standard is “market”,
particularly in engagement letters.
Although the concept of “gross” negligence is now
frequently used, it has no universal meaning or definition
in the English civil law which would make it distinct from
simple negligence. Whilst historically the English courts
had refused to give any effect to contractual clauses
referring to “gross” negligence, as opposed to plain
negligence, modern case law indicates that the courts will
normally give effect to the word "gross" where a contract
expressly refers to gross negligence. Every indemnity and
exclusion clause will however be interpreted in its textual
and factual context, and no expression has a universal
meaning, which makes the line between the two terms
blurry.
The courts appear to be drawing a distinction between
negligence consisting of a departure from the normal
standard of conduct and a serious, unusual, and marked
departure from that standard. In the former case the courts
tend not to find gross negligence. In the latter case the
courts will find gross negligence if the complaint supplies
particularized allegations of a heightened seriousness of
the circumstances or consequences of the negligent error.
The courts are concerned that the availability of damages
for gross negligence not lead to the indemnifying party
being held accountable for business decisions that
were not obviously wrong. In Red Sea Tankers Ltd v
Papachristidis (The Ardent) [1997] 2 Lloyd's Rep 547, 586,
Mance J stated: “‘Gross negligence is clearly intended to
represent something more fundamental than failure to
exercise proper skill and/or care constituting negligence.
But, as a matter of ordinary language and general
impression, the concept of gross negligence seems to me
capable of embracing not only conduct undertaken with
actual appreciation of the risks involved, but also serious
disregard of or indifference to an obvious risk.”
