In this week’s update: The National Security and Investment Act 2021 becomes law, the FCA consults on investor protections for SPACS, a director was jointly liable for improper payments authorised by a co-director, the digital stamp duty process becomes permanent, changes to the UK’s insider dealing and market abuse regime, Glass Lewis’s position on “Say on Climate” votes, a consultation on withdrawing approval for a financial promotion, the Law Commission calls for evidence in relation to digital assets and ESMA publishes updated prospectus Q&A.
- The National Security and Investment Act 2021, which introduces the UK’s new national security regime, becomes law
- The FCA is consulting on new investor protection measures for special purpose acquisition companies (SPACs)
- A director was jointly liable for breach of duty arising out of improper payments authorised by a co-director
- HMRC’s temporary process for paying stamp duty digitally becomes permanent
- Changes to the UK’s insider dealing and market abuse regimes become law
- Glass Lewis sets out its position on proposals for annual shareholder “Say on Climate” votes
- The FCA is consulting on the regime for withdrawing approval for a financial promotion
- The Law Commission is seeking evidence in relation to digital assets
- ESMA publishes an updated version of its Prospectus Regulation Q&A
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UK’s new national security regime becomes law
The National Security and Investment Act 2021 has received Royal Assent, enshrining the UK’s new national security screening regime in law.
Although now law, the regime is not yet live and will not come into effect until a day appointed by the Government.
The regime contained in the Act is almost identical to that proposed when the National Security and Investment Bill was introduced into Parliament (see our previous Corporate Law Update). For ease, we have set out below a summary of how the regime will operate.
- The regime will apply whenever a trigger event Fundamentally, this involves the acquisition of a specified kind of interest in or control over certain kinds of entity or asset. See below for more detail.
- If the acquisition is to take place in a specified sector, the acquirer will need to make a mandatory notification to the Investment Security Unit (ISU). The Government is currently finalising the specified sectors. These include areas such as artificial intelligence, communications, data infrastructure, defence, energy, nuclear, quantum technology, synthetic biology and transport.
- Outside of the specified sectors, parties may choose to make a voluntary notification if they consider that the transaction may give rise to national security concerns.
- If the Government believes that an acquisition may pose a risk to national security, it may exercise its “call-in power” to screen the acquisition.
- The Government will have wide-ranging powers to request information from the transaction parties and to impose remedies to address national security risks.
- The Government’s powers apply to trigger events occurring on or after 12 November 2020.
- The regime is backed up by civil and criminal sanctions.
What is a “trigger event”?
Broadly, a trigger event will occur if someone acquires, or proposes to acquire:
- shares in a qualifying entity that take its percentage shareholding to above 25%, to above 50%, or to 75% or more;
- voting rights in a qualifying entity that take its percentage holding voting rights to above 25%, to above 50%, or to 75% or more;
- voting rights in a qualifying entity that enable it to secure or prevent the passing of any class of resolution governing the entity’s affairs;
- the ability to materially influence the policy of a qualifying entity; or
- a right or interest in or relating to a qualifying asset which gives that person the ability to use, or direct or control the use of, that asset.
Only the first three of these triggers will give rise to a mandatory notification where the acquisition is in a specified sector. In the original Bill, the threshold for a mandatory notification under the first two triggers was reduced to 15%. However, this has not been carried through into the Act and so the same trigger thresholds will apply to both mandatory and voluntary notifications.
The concept of “qualifying entity” is broad and includes companies, partnerships, unincorporated associations and trusts. It includes both UK entities, as well as overseas entities that carry on activities in the UK or supply goods and services to persons in the UK.
“Qualifying assets” include land, tangible property and certain types of intellectual property (such as trade secrets, databases, source code, algorithms, formulae, designs and software).
How will acquisitions be screened?
If the Government decides to call a transaction in, it will have 30 working days to decide whether to allow it to proceed. It will be able to extend that period by a further 45 working days if it reasonably considers it necessary to do so. The Government and the acquirer will be able to agree an additional voluntary extension if the Government is satisfied that a risk to national security has arisen and it requires additional time to consider whether to make a final order.
The Government will be able to impose orders on transaction parties while it screens an acquisition. These would include (for example) requiring parties not to consummate a transaction and not to disclose any information to anyone.
If the Government is satisfied that an acquisition involves both a trigger event and a risk to national security, it will be able to impose a “final order”. This will allow the Government to attach conditions to a transaction or to block or unwind a transaction.
What happens next?
As noted above, the regime will come into effect on a day appointed by the Government, which is anticipated to be towards the end of 2021. We will continue to monitor developments so as to provide further information ahead of time.
In the meantime, the Department for Business, Energy and Industrial Strategy (BEIS) will be preparing for commencement of the regime. Among other things:
- BEIS is intending to publish guidance for market participants and other stakeholders. In addition, BEIS has announced that it will look to work closely with investors and businesses, including through a cross-sector “Expert Panel”, to ensure they understand the new regime.
- The Government will need to finalise the list of specified sectors in which an acquisition will trigger a mandatory notification. It has previously consulted on this and recently published a response with revised proposals (see our previous Corporate Law Update for more information).
- BEIS will continue assembling the ISU, which will be tasked with assessing notifications and screening transactions that pose a potential national security risk.
FCA consults on protection measures for SPACs
The Financial Conduct Authority (FCA) has published a consultation on proposed changes to its Listing Rules to revise investor protection measures for special purpose acquisition companies (SPACs).
A SPAC is a company that is established as a vehicle for raising capital from investors on the capital markets, which it then deploys to acquire another business by way of a reverse takeover. SPACs are not new and have been able to list in the UK for some time. However, the FCA notes that, since early 2020, there has been a significant increase in the level of global SPAC IPO activity.
Currently, when a UK-listed SPAC identifies a potential acquisition, there is a presumption that the SPAC’s securities will be suspended pending the acquisition (although the FCA can decide not to suspend). This is designed to protect investors from disorderly markets arising out of the unavailability of complete information on the proposed acquisition. However, it also means that investors are unable to buy or sell shares in the SPAC, and so realise their investment, for a period of time.
The FCA believes that this represents a disproportionate barrier to listing for larger SPACs that build specific investor protections into their structures. It is therefore proposing to introduce new investor protections for investors in SPACs. SPACs that apply these investor protections would not see their securities suspended on identifying an acquisition opportunity.
Under the FCA’s proposals, a SPAC would not face an automatic suspension of its securities if it meets the following criteria.
- Size. The SPAC would need to raise at least £200 million gross cash proceeds from public shareholders at the date of listing. “Public shareholders” would not include directors, founders or anyone promoting the SPAC, and funds provided by sponsors would not count towards the threshold.
- Ring-fencing. Proceeds raised by the SPAC would need to be ring-fenced via an independent third party. The arrangement would need to provide that funds can be released only to fund an acquisition, redeem shares in the SPAC or return capital to the SPAC’s public shareholders if the SPAC fails to make an acquisition.
- Time limit. The SPAC’s constitution would need to impose a time limit of two years from listing for the SPAC to make an acquisition. The SPAC would also need to advertise this two-year limit in its prospectus on admission to trading. The SPAC would be able to extend this to three years with the approval of its public shareholders. If no acquisition is made within the time limit, the SPAC’s funds would be returned to shareholders.
- Board approval of acquisition. The SPAC’s board would need to approve any proposed acquisition by the SPAC. For these purposes, any director of the proposed target, or anyone with an interest in the proposed target, would be excluded from voting.
- Shareholder approval of acquisition. The SPAC would need to provide its shareholders with the right to vote on a proposed acquisition. For these purposes, the SPAC’s sponsors would be excluded from voting. The SPAC would need to disclose to shareholders sufficient information on the proposed transaction for them to make a properly informed decision when voting.
- “Fair and reasonable statement”. If any of the SPAC’s directors has a conflict of interest in relation to the target of the proposed acquisition, the SPAC would need to publish a statement in advance of the shareholder vote that the proposed transaction is fair and reasonable as far as the public shareholders of the company are concerned.
- Redemption option. The SPAC’s shareholders would need to be offered the option to redeem their shares at a pre-determined price in order to give them a means to exit their shareholding if they do not like the target or final terms of a proposed acquisition. The terms of the redemption option would need to be detailed in the SPAC’s prospectus.
- Disclosure. When announcing a proposed acquisition, the SPAC would need to disclose details of the target’s business, links to all relevant publicly available information on the target, any material terms of the proposed transaction (including any expected dilution of public shareholders) and the proposed timeline for negotiations. It would also need to disclose how it has assessed and valued the target, as well as any other material details and information which investors need to make an informed decision. The SPAC would also need to keep this information up to date.
A SPAC that meets these conditions at the point of announcing an acquisition would be free of the presumption that its shares would be suspended. However, the FCA would retain a general power to suspend a SPAC’s shares if it has other concerns about the smooth operation of the market.
The FCA has asked for comments by 28 May 2021.
Director was jointly liable for misappropriations by his co-director
The High Court has found that a director was jointly liable for improper payments made by his co-director, even though he did not have full knowledge of the payments.
Baker v Staines  EWHC 1006 (Ch) concerned a company in the business of providing online credit card payment services. 80% of the company’s shares were held by one of its two directors (AM) and the remaining 20% by the other director (DS).
Over the course of six years, AM directed the company to make various payments to himself, to DS and to a company owned by him and DS. These included certain cash transfers and withdrawals which AM made to himself (the cash transfers).
The company subsequently entered liquidation. The liquidator applied to claw back the payments (including the cash transfers), claiming that they were in fact disguised distributions by the company to its shareholders. The liquidator argued that the company had not followed the proper procedure in paying those distributions. In particular, the company had incorrectly filed dormant company accounts and so had not been able to justify the distributions by reference to “relevant accounts”, as required by the Companies Act 2006.
The liquidator also claimed that, in authorising the distributions, the directors had breached several of their statutory duties to the company in the Companies Act 2006, including to promote the company’s success (section 172), to exercise independent judgment (section 173) and to exercise reasonable care, skill and diligence (section 174).
DS claimed that he was not liable for breaches of duty arising out of the cash transfers, because he had neither authorised them nor known about them. Alternatively, he claimed that, if he was jointly liable, he had acted honestly and reasonably, and the court should therefore exercise its discretion under the Companies Act 2006 to relieve him of liability.
What did the court say?
The court disagreed. The judge acknowledged that DS was not aware of the transfers: he had most likely not been copied into emails regarding them, he did not have online access to the relevant bank account, and he was not aware that AM was in possession of a debit card used to make the cash withdrawals.
However, the court found that DS had sufficient knowledge of what was happening that he ought to have made enquiries to ascertain whether any impropriety was taking place. The judge noted the following in particular:
- DS had signed off on dormant accounts for the company when he knew the company was clearly not dormant and was actively conducting business.
- AM had sent payments to DS without any clear explanation of the basis of those payments, and DS had not made any enquiries into this.
- As a result of that, DS had assumed that AM had also been making payments to himself, but, again, DS had not enquired into the basis for those payments.
Although DS was entitled to place trust in AM for handling the company’s financial affairs, once he had grounds for suspecting that AM was acting dishonestly, he was required to act on those suspicions. The judge noted that DS should have checked, at least once, that the only other person in control of the company's finances was properly handling them. However, he had never asked to be given access to the relevant bank account or to inspect any account statements.
The fact DS misguidedly placed trust in AM did not relieve DS from the duties he owed as a director of the company. By relying completely on AM to apply the company's money properly, DS had breached the basic standard of exercising reasonable skill, care and diligence.
The judge also declined to exercise any discretion to relieve DS from liability. Although DS had not conducted himself dishonestly, his conduct had been “naïve” and “grossly negligent” and the judge was unable objectively to conclude that he had acted reasonably.
What does this mean for me?
The decision shows the risks for directors of placing over-reliance on their colleagues in relation to key elements of a company’s business.
It is perfectly possible – indeed, in many cases, sensible and customary – for a board to entrust responsibility for specific functions, such as financial, operational, technical, legal or HR matters, to one or more of their number. This is part and parcel of the efficient running of a business.
However, directors must remember that they act as a board and share collective responsibility for a company’s success. It is not possible for a director to abrogate their duties to a company, including duties to act independently and to exercise reasonable care and skill, by delegating matters to another director or some other executive.
Directors will need to demonstrate that they acted reasonably when entrusting responsibilities to someone. This might include, for example, ensuring the relevant person has appropriate experience and background in the area of responsibility to be delegated to them, and requiring them to provide regular updates on matters in that area of responsibility.
Likewise, directors should always keep their overarching responsibilities in mind and maintain a watchful eye over activities delegated to one or more of their number. Should a director suspect any impropriety or note anything unusual, they should raise it with the board and follow up.
Temporary procedure for paying stamp duty digitally becomes permanent
HM Revenue & Customs (HMRC) has updated its guidance on stamp duty to confirm that its temporary procedure for paying stamp duty during the Covid-19 pandemic has now been made permanent.
Stamp duty is a charge that needs to be paid on certain documents in order to enforce them in court. It now applies mainly to transfers of shares (or beneficial interests in shares) in companies, including stock transfer forms, certain declarations of trust over shares, Companies House Form SH03 (on a buy-back of shares) and on an order effecting a scheme of arrangement on a takeover.
Stamp duty is distinct from stamp duty land tax (SDLT), which is payable on certain transfers of real estate in England.
Before the Covid-19 pandemic began, it was necessary to send a hard copy of the relevant document to HMRC’s Stamp Office in Birmingham, together with payment, following which HMRC would “stamp” the document by making a physical impression on it using a machine.
Under HMRC’s Covid-19 temporary procedure, rather than sending a hard copy of a document to HMRC, a person paying stamp duty would email an electronic copy to HMRC and make payment separately via electronic transfer. On receipt of payment, HMRC would email back an authentication code to act as proof that stamp duty had been paid.
HMRC has now confirmed that this procedure has been made permanent, with a few small changes. As a result, the procedure will now operate as follows.
- A person wishing to pay stamp duty should send the relevant document to HMRC by email to [email protected]. HMRC has, however, acknowledged that there are risks with using email and so has provided an alternative postal address for anyone who wishes to send their document by post instead.
- The person should also pay the stamp duty to HMRC at the same time. HMRC will not process a document for stamping without receiving payment. See HMRC’s separate guidance for more information on paying stamp duty.
- Following stamping, HMRC will send a letter containing a verification code. This code acts as a “digital stamp” in place of the old physical stamp and should be sent to the company’s secretary or registrar to allow them to update the company’s books and issue a new share certificate.
The verification code should be kept with the stamped document in case of future disputes. The easiest way to achieve this is to annotate the stamped document with the verification code. If the document is in physical form, this can be done by writing the code onto the document by hand. If the document is in electronic form (e.g. PDF), we would suggest either annotating the electronic document using PDF editing software or writing the code manually onto a print-out of the document.
HMRC notes that it aims to deal with 80% of stock transfer forms within 15 working days of receipt but advises applicants to allow 20 working days for stamping to be completed.
As a result of the new guidance, where a document has been stamped digitally since March 2020 under HMRC’s previous temporary procedure, there is no need to re-submit it for stamping under the permanent procedure. (There had previously been some doubt over this.)
Changes to insider dealing and market abuse become law
The Financial Services Act 2021 has received Royal Assent. Among other things, the Act makes some changes to the UK’s criminal and civil insider dealing and market abuse regimes.
- Insider lists. The Act clarifies that both an issuer and anyone acting on behalf of an issuer would be required to keep an insider list. In other words, an issuer will no longer be able to “delegate” the task of keeping an insider list to its professional advisers.
- Transactions by managers. Where a person discharging managerial responsibilities (a PDMR) or a person closely associated with them notifies an issuer that they have transacted in the issuer’s shares, the issuer will now have two working days from receiving the notification to notify the market, rather than three business days from the date of the transaction.
- Criminal insider dealing. The maximum penalty for the criminal offence of insider dealing (under the Criminal Justice Act 1993) will be increased from seven years’ to ten years’ imprisonment.
- Misleading impressions. The maximum penalty for the criminal offence of making a misleading statement or giving a misleading impression in relation to investments (under the Financial Services Act 2012) will be increased from seven years’ to ten years’ imprisonment.
The increases in criminal penalties take effect on a date to be appointed. The other changes take effect from 29 June 2021.
Glass Lewis sets out position on shareholder climate votes
Global proxy adviser Glass Lewis has published its position on companies’ proposals to adopt an annual shareholder vote in relation to their climate strategy.
The adviser has stated that, with myriad proposals going to a vote in the coming months, it is important to provide the market with its initial observations and considerations when evaluating them. Given the broad variety of proposals, Glass Lewis will apply a case-by-case approach on this issue, but it intends to codify its approach in advance of the 2022 AGM season.
Glass Lewis has noted two different proposals for annual general meetings (AGMs) in 2021:
- Establishing a policy creating the framework for annual votes (so-called “Say on Climate”) on climate disclosures and/or strategy at future AGMs.
- Requesting shareholder approval for the company’s climate transition plan at the 2021 AGM (i.e. a Say on Climate at the 2021 AGM).
It then cites various examples of proposals put forward to date.
The adviser believes there may be a number of benefits to Say on Climate, including ensuring that companies produce robust reports aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures and allowing for engagement on issues related to climate.
However, it is also concerned that offering a shareholder vote on a climate strategy could lead to unintended consequences, including the following:
- Investors who lack the capacity or technical ability to analyse the plans might provide a “rubber stamp” for climate strategies that are out of alignment with broader climate goals.
- Shareholder support for a corporate climate plan might affect the right of shareholders to take future legal action should those disclosures turn out to be fraudulent in some way.
- Companies’ climate reports are generally separate from their financial statements and may be subject to fewer assurance mechanisms, raising concerns over the adequacy of the data.
- Asking shareholders to approve a company’s overall business strategy in a single vote painted with “broad-brush strokes” may lead to investors unintentionally signing off on certain aspects of strategic plans without a full and reasoned analysis of their effects.
Glass Lewis recommends that, pending standardisation of Say on Climate votes, shareholders should approach proposals with caution. As a result, it will generally recommend against proposals requesting that companies adopt a policy to provide shareholders with an annual Say on Climate vote.
Where a company proceeds straight to a Say on Climate vote at its AGM, Glass Lewis will evaluate the proposals on a case-by-case basis, as set out in the position paper.
Also this week…
- FCA consults on financial promotion rules. The Financial Conduct Authority has published Discussion Paper 21/1, in which (among other things) it is consulting on the circumstances in which an FCA-authorised person should withdraw their approval of a financial promotion under section 21 of the Financial Services and Markets Act 2000. The paper sets out a number of proposed “ongoing monitoring requirements” that would be imposed on the authorised person. The FCA has requested responses by 1 July 2021.
- Law Commission calls for evidence on digital assets. The Law Commission has launched a call for evidence to seek views about the ways in which market participants are using and dealing with digital assets, as well as the potential consequences of digital assets being "possessable". The call for evidence is designed to precede a consultation paper on digital assets, which will make proposals for law reform. The Commission has asked for responses to the call for evidence by 30 July 2021.
- ESMA publishes updated prospectus Q&A. The European Securities and Markets Authority (ESMA) has published an updated version of its Q&A on the Prospectus Regulation. New topics covered include determining an issuer’s “home state” when issuing global depositary receipts (GDRs), publication of supplementary prospectuses by non-equity issuers, and credit-rating disclosures in prospectuses. The Q&A do not apply to UK securities exchanges but may be useful to UK issuers with a listing within the European Union.