GENERAL CORPORATE

Sherlock Holmes International Society Limited v Mr John Aidiniantz [2016] EWHC 1076

The recent decision in Sherlock Holmes International Society Limited v Mr John Aidiniantz [2016] EWHC 1076 serves as a useful reminder that the articles of association of a company can be amended through the conduct of its members.

Background

The facts of this case are unusual and arise out of a family dispute. The case concerned an application by the Company’s shareholder, JA, for the dismissal of an appeal by the Company, acting through its director, Mr R, against a petition by JA to wind up the Company.

JA argued that the Company did not properly authorise the appeal because its director was not properly appointed. JA’s primary argument was that Mr R was not qualified to be a director because he was not a member of the Company (under the Company’s articles, only persons who are members of the Company are eligible to be directors).

Decision

Amendment to articles

The Court noted that the articles of a company are a species of contract between its members, and that they can be amended by agreement.

From the starting point of the Duomatic principle (shareholders can make decisions by informal unanimous consent), the Court considered whether the members of the Company (JA and G) amended the articles of the Company through their conduct, such that the membership requirement did not apply to Mr R.

The Court noted that agreement may be reached informally (Cane v Jones [1980] 1 WLR 1451), and that agreement can be inferred from conduct (Blackpool and Fylde Aero Club  Ltd v Blackpool Borough Council [1990] 1 WLR 1195). The Court further noted that there is no reason in principle why an agreement inferred from conduct cannot apply to an agreement to amend the constitution of a company (Re Home Treat Ltd  [1991] BCC 165).

The Court considered what intentions of JA and G could be objectively discerned from various appointments and re­appointments of non-member directors since the incorporation of the Company in 2004 to 2014. The Court determined that when JA and G allowed non-members to be appointed as directors, the obvious inference is that they intended that they be thenceforth qualified to be directors.

Impact

This judgment raises some interesting points on amendments to articles of association, in particular, that articles can be amended by conduct.

When will conduct amount to an agreement to amend the articles of a company? It seems that the question to ask is “whether the members’ words and conduct give rise on objective analysis to the conclusion that they intended to amend the articles”. Furthermore, “Where conduct alone is relied upon, that conduct must lead to the conclusion that on the balance of probabilities the members intended to amend the articles and, further, intended to make the particular amendment contended for.”

Market Abuse Regulation 2016 amended following publication of the Benchmark Regulations 2016/1011 in the Official Journal of the European Union (the “Official Journal”)

Following publication of the Benchmark Regulations  2016/1011 in the Official Journal, various amendments have been made to the Market Abuse Regulation 2016 (“MAR”). The key amendments are as follows:

Article 19 MAR – Managers Transactions

Article 19(1) MAR places a notification obligation on any person discharging managerial responsibility (“PDMR”), or any persons closely associated with them (“their Associates”), to notify issuers of any relevant transaction on their own accounts.

Following the publication of the Benchmark Regulation, the notification obligation under Article 19 will no longer apply to transactions in financial instruments linked to shares or to debt instruments of the issuer where at the time of the transaction any of the following conditions were met:

  • the financial instrument is a unit or share in a collective investment undertaking ('CIU”) in which the exposure to the issuer’s shares or debt instruments does not exceed 20 per cent of the assets held by the collective investment undertaking;
  • the financial instrument provides exposure to a portfolio of assets in which the exposure to the issuer’s shares or debt instruments does not exceed 20 per cent of the portfolio’s assets; or
  • the financial instrument is a unit or share in a CIU or provides exposure to a portfolio of assets and the PDMR or their Associates does not know, and could not know, the investment composition or exposure of such CIU or portfolio of assets in relation to the issuer’s shares or debt instruments, and furthermore there is no reason for that person to believe that the issuer’s shares or debt instruments exceed the thresholds in either of the conditions above.

Article 19(7)(b) MAR has also been amended. Article 19(7) (b) MAR provides that where transactions are undertaken by managers of a CIU in which a PDMR or their Associates have invested, the transaction should give rise to a notification under Article 19(1).

Following the publication of the Benchmark Regulations, this obligation is now subject to the exception that if the CIU manager operates with full discretion (which excludes the manager from receiving any instruction or suggestions from investors on the CIU’s composition) then a notification does not need to be made.

Article 38 MAR – Report

Article 38 MAR requires the European Commission to report to the European Parliament and Council on various aspects of the application of MAR (and suggest appropriate legislative amendments where necessary) by no later than 3 July 2019.

The Benchmarking Regulation has now established that the European Commission must also report on the appropriateness of the 20 per cent thresholds that have been established for the purposes of the new exceptions to the Article 19(1) notification obligation, set out above. This means that the thresholds may be subject to change in the future, with a positive obligation placed on the European Commission to assess the thresholds’ levels and indicate whether they believe they need to be adjusted.

Impact – All the changes set out above are made under Article 56 of the Benchmarking Regulation 2016/1011. As per Article 59 of the same regulation, all of the changes came into force on 3 July 2016 in alignment with MAR.

PUBLIC COMPANY

ICSA, the GC100, the Governance Institute and the QCA jointly produce a draft specimen dealing code and policy document Following the Market Abuse Regulation ('MAR”) becoming directly applicable in the UK on 3 July 2016, ICSA: The Governance Institute, the GC100 and the Quoted Companies Alliance have jointly produced a guidance note on MAR for companies with financial instruments admitted to trading on the Main Market of London Stock Exchange or quoted on AIM.

The principal purpose of the guidance note is to produce a, ‘single industry-led dealing code rather than a variety of, no doubt broadly similar, codes which would potentially create confusion in the market’.

The guidance note consists of:

  • a specimen group wide dealing policy that applies to all directors and employees and reminds them of obligations in relation to inside information;
  • a specimen share dealing code (which is broadly the equivalent of the Model Code) in two sections:
    • part A, which sets out clearance to deal procedures for persons discharging managerial responsibilities ('PDMRs”) and those other persons to whom the code applies by virtue of being on an insider list
    • part B, which sets out additional provisions applicable
  • to PDMRs including in relation to ‘closed periods’, the requirement to notify transactions and provisions relating to persons closely associated with PDMRs and their investment managers; and
  • a specimen dealing procedures manual which seeks to assist issuers in ensuring that they have the necessary systems and controls in place to assist their PDMRs and other employees in complying with their obligations under MAR.

The specimen dealing code, the group wide dealing policy and the specimen manual are being submitted to the FCA and London Stock Exchange for their review and comment and may be revised should any comments be received.

Takeover board dismisses three shareholder appeals following the acquisition of Gala Coral Ltd by Ladbrokes plc

The Takeover Appeal Board (the “Board”) has recently published its decision to dismiss three appeals submitted by a shareholder of Ladbrokes plc in connection with certain matters under the Takeover Code (the “Code”). The appeal was made in connection with the acquisition by Ladbrokes plc of Gala Coral Group Ltd (the “Target”, a UK private limited company), in exchange for new shares in Ladbrokes plc (representing circa 48 per cent of the enlarged Ladbrokes plc group) being issued to the vendor.

The provisions of the Code were applicable to the transaction as a result of the independent shareholders of Ladbrokes plc passing a “whitewash” resolution, which enabled the Takeover Panel to waive the requirement of the vendor to make a mandatory offer for the entire issued share capital of Ladbrokes plc under Rule 9 of the Code. Ladbrokes plc produced a whitewash circular in connection with the whitewash resolution.

The Code requires that a whitewash circular:

  • includes “a summary of the principal contents of each material contract (not being a contract entered into in the ordinary course of business).. entered into in the period beginning two years before the commencement of the [transaction]” (Rule 25.7); and
  • that “any material contract entered into by [the company] in connection with the [transaction] that is described in the [whitewash circular] in compliance with Rule 25.7” is published on a website at the same time as the whitewash circular (Rule 26.3). Therefore only the material contracts that are entered into “in connection with” the transaction are required to be disclosed in full, and other material contracts are only required to be summarised in the whitewash circular.

Whereas the content of the appeals is specific to the facts of the case, there are some points of broader relevance that were considered by the Board:

The Board considered whether an amendment agreement to an existing commercial arrangement of Ladbrokes plc was properly disclosable as a contract outside the “ordinary course of business”. The Board noted that the term “ordinary course of business” as used in Rule 25.7 must be interpreted in the light of the meaning which ordinary business people would give it in the particular context in which it was used. In the view of the Board, the fact that a significant payment (£75m) was due to be made to the counterparty which was unrelated to future performance or success, and only conditional on the implementation of the transaction, was plainly outside the ordinary course of business (especially having regard to the size of Ladbrokes plc’s business, assets and profitability).

The Board also considered whether the amendment agreement was entered into “in connection with” the transaction. The Board noted that “in connection with” are ordinary words of the English language and must be given a common sense interpretation. The Board agreed with the hearings committee that if the words “in connection with” are given too wide meaning they would potentially catch any material agreement that may be “occasioned by” an offer or merger, for example to reflect a new corporate structure, and to require publication in full of numerous agreements of no significance to voting shareholders.

However, the Board considered that the amendment agreement in question was very different to the “run-of-the-mill” adjustments to commercial arrangements occasioned by the enlargement of the group, and was instead intimately connected with the transaction and designed to avoid the impact of the transaction on prior commercial agreements, which the Board considered to be an impact of very considerable importance.

Impact – the decision provides confirmation that a modification of existing commercial arrangements which is “intimately connected with a transaction” is likely to be regarded as in “connection with” the transaction and therefore, along with a description in the whitewash circular, offer document or scheme circular (as appropriate), trigger a requirement to publish the modification of such arrangements on the company’s website.

OTHER ITEMS

  • Following the FRC’s publication of the discussion paper “Improving the Quality of Reporting by Smaller Listed and AIM Quoted Companies” in June 2015 (as previously covered here), the FRC has this week published an  update to that paper. The update provides an overview of the feedback to the discussion paper and an update on decisions and progress against the proposals in the following key areas:
    • reporting requirements and practices;
    • audit practices; and
    • company governance and resources.
  • The European Commission has published several technical standards following the implementation of the Market Abuse Regulation 2016 (“MAR”). The Commission has now published a table that sets out all of the technical standards under MAR and their current state of play, including whether the standards have been published in the Official Journal.
  • The Investment Association has published the following guidance notes:

The Investment Association has amended its Principles of Remuneration following the implementation of the Market Abuse Regulation 2016 (“MAR”). The amendment was necessary because of the new definition for “closed periods” prescribed by MAR. The amendment relates to the timing of share awards, as covered by Section C.2.vii of the Principles of Remuneration, which now provides that “the rules of a scheme should provide that share or option awards should normally be granted within a 42 day period immediately following  the end of the closed period under [MAR]”.

The Investment Association has published guidelines on share capital management. The guidance sets out the expectations of The Investment Association’s members as institutional investors on various aspects of share capital, such as the allotment of shares, disapplication of pre-emption rights and share buy-backs. The guidance applies to companies whose shares are admitted to the premium segment of the Official List of the UK Listing Authority, but companies whose shares are admitted to the standard segment of the official list, to trading on AIM or to the High Growth Segment of the London Stock Exchange’s main market are also encouraged to adopt the guidance.