RPC Big Dealhttps://www.rpc.co.uk/rss/big-deal/RPC Big Deal RSS feeden{CED7463E-7672-4D98-8E75-87CCFAD9988C}https://www.rpc.co.uk/perspectives/rpc-big-deal/reversal-of-recent-changes-to-the-financial-promotions-order/Reversal of recent changes to the Financial Promotions OrderWed, 27 Mar 2024 15:11:00 ZRPC big dealWhitney SimpsonWe recently reported on changes to the Financial Promotions Order 2005 which came into effect on 31 January 2024.

On 6 March 2024, the Treasury published and laid before Parliament the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment and Transitional Provision) Order 2024 following significant concerns being raised about the potential unintended impacts of these recent changes. Stakeholders highlighted that the changes could affect the ability of start up businesses to obtain investment and the ability to finance theatre productions through small-scale investors. 

The new Order reverses the changes that had been made to the eligibility criteria for the exemptions under Article 48 and 50A of the Financial Promotions Order 2005. 

The amendments made include:

  • Reducing the financial thresholds to be eligible for the high net worth individual exemption by reinstating the income and net assets thresholds that were in place prior to 31 January 2024, ie £100,000 and £250,000 respectively
  • Amending the eligibility criteria for the self-certified sophisticated investor exemption by
    • Reinstating the additional criterion of having made two or more investments in an unlisted company in the previous two years.
    • Reducing the level of company turnover required to satisfy the "company director" criterion back to £1 million.

These changes came into effect on 27 March 2024.

What does this mean?

You should update your new investor statement templates for use from 27 March 2024 to reflect these changes.

However, the new Order contains transitional provisions for investor statements based on the changes which came into force on 31 January 2024, so you don't need to rush out and get a new investor statement signed straight away.  The Order makes it clear that any investment statements that comply with the changes that came into force on 31 January 2024 will remain valid until 30 January 2025.

Besides the changes to eligibility criteria detailed above, all other changes that came into effect on 31 January 2024 continue to apply.

]]>
{FE45215A-241E-4C45-8E8D-6B95D2ABF88A}https://www.rpc.co.uk/perspectives/rpc-big-deal/provisions-of-economic-crime-and-corporate-transparency-act-2023-now-in-force/Provisions of Economic Crime and Corporate Transparency Act 2023 now in forceThu, 14 Mar 2024 10:05:00 ZRPC big dealRosamund AkayanA number of the provisions of the Economic Crime and Corporate Transparency Act 2023 came into force on 4 March 2024. This Act is intended to give UK Companies House greater powers to prevent UK companies from being used for economic crimes.

The key changes are: 

  • The requirement to register and maintain an email address for correspondence with Companies House, which will need to be provided when the next confirmation statement is filed. This should be an email address which is regularly monitored by the company.  This email address will not be made public.
  • The requirement that a company's registered office is an "appropriate address". This means an address where documents delivered will come to the attention of the company and where delivery can be acknowledged.
  • The requirement to send a confirmation of lawful intended future activities at the same time as any confirmation statements.

Further provisions of the Economic Crime and Corporate Transparency Act 2023 are due to come into force later in 2024, although we don't yet know the date. These provisions are expected to be more wide ranging, and include a requirement for the identity of all directors of UK companies to be verified.  

]]>
{30F3E206-D28D-4820-AF1B-61D20667DC9D}https://www.rpc.co.uk/perspectives/rpc-big-deal/spring-budget-2024-main-tax-announcements/Spring Budget 2024 – Main tax announcementsTue, 12 Mar 2024 14:22:00 ZRPC big dealBen RobertsThe Chancellor, Jeremy Hunt, delivered his pre-election Spring Budget on Wednesday 6th March.

Reflecting the difficult balancing act for a Chancellor in the run-up to an election but faced with uncertain financial forecasts, there was limited scope for major tax announcements.

The main business and personal tax announcements made by the Chancellor are summarised below. Some of these had been expected but there were also a few surprises.

Corporate taxes

1. Corporation tax rates: The main rate of corporation tax is to be maintained at 25% for the financial year beginning on 1 April 2025. The small profits rate is also unchanged, at 19%.

2. Potential extension of 'full expensing' to leased assets: It was announced that there is to be a consultation on any extension to leased assets of the 100% first-year allowance regime ('full expensing') for main rate expenditure and the 50% first-year allowance regime for special rate expenditure.

3. Creative and cultural tax reliefs: An enhanced expenditure credit (at 53% of qualifying expenditure) for qualifying UK independent films was announced, with effect from 1 April 2024. An increase in the rate of tax relief for qualifying expenditure on visual effects in TV and films was also announced. Also, from 1 April 2025, permanently higher rates of tax relief for theatres, orchestras, museums and galleries will take effect.

4. VAT threshold: For the first time since 2017, the compulsory VAT registration threshold has been increased (to £90,000, from £85,000 currently). This will take effect from 1 April 2024.

Property taxes

5. CGT rates on residential property: From 6 April 2024, the higher rate of capital gains tax for non-exempt residential property gains will fall to 24% (from the current rate of 28%) for individuals, trustees and personal representatives. The lower rate will remain unchanged at 18%.

6. Abolition of SDLT multiple dwellings relief: With effect from 1 June 2024, relief from stamp duty land tax (SDLT) on acquisitions of multiple dwellings will be abolished. Multiple dwellings SDLT relief currently applies to single acquisitions of more than one dwelling provided certain conditions are met and broadly operates to set the applicable rates of SDLT by reference to the average price per dwelling rather than the total price paid.

7. SDLT and public bodies: With effect from 6 March 2024, acquisitions by public bodies (central and local government bodies, health authorities and other prescribed bodies) will no longer fall within the 15% SDLT rate applicable to acquisitions of dwellings by companies and other non-natural persons. Such bodies were already outside the scope of the Annual Tax on Enveloped Dwellings charge.

Personal taxes

8. NIC rates cuts: From 6 April 2024, the main rate of primary Class 1 National Insurance contributions will be reduced from 10% to 8%. A similar reduction from 8% to 6% will take effect from the same date for the self-employed.

9. Abolition of the 'Non-Dom' tax regime: The long-standing and often challenged remittance basis of taxation for non-UK domiciled individuals will be abolished from 6 April 2025. A new residence-based regime will apply instead, under which previously non-resident taxpayers coming to the UK will not pay UK income tax or capital gains tax on foreign income and gains arising in their first 4 years of UK tax residence. We await full details of the new regime.

10. Proposed changes to inheritance tax regime: The government announced plans to move from a domicile-based inheritance tax regime to a residence-based inheritance tax regime from 6 April 2025. A consultation on these plans will follow and we await details as to the form they may take.

]]>
{6328FDD6-4C7D-4C91-B4A7-630018C47CF5}https://www.rpc.co.uk/perspectives/rpc-big-deal/changes-to-the-financial-promotions-order-you-need-to-know-about/Thinking of marketing a sale of unlisted shares?… There have been some changes to the Financial Promotions Order you need to know aboutTue, 27 Feb 2024 14:08:00 ZRPC big dealWhitney SimpsonThe Article 48 high net worth individual and Article 50A self-certified sophisticated investor exemptions are two of the most commonly relied on exemptions of the FPO, particularly for private company fundraisings. Generally, these exemptions allow unauthorised firms to raise money from certain types of investors such as business angels and other high net worth individuals. 

The last time these exemptions were updated was in 2005. However, in 2021 the FCA raised concerns that they were no longer fit for purpose, leading to HM Treasury consulting on some key changes to help prevent misuse of the exemptions and ensure greater investor engagement. 

Following the consultation, HM Treasury published a new statutory instrument which has made the following changes:

  • The financial thresholds for high net worth individuals have been increased, requiring either:
    • income of at least £170,000 (previously £100,000) in the last financial year; or
    • net assets of at least £430,000 (previously £250,000) throughout the last financial year.
  • The eligibility criteria for a self-certified sophisticated investor have been amended to:
    • remove the requirement of having made more than one investment in an unlisted company in the previous two years; and 
    • increase the company turnover required to satisfy the "company director" requirement to £1.6 million (from £1 million).
  • "Certified high net worth individual" has now become "high net worth individual", with new prescribed statement templates indicating that the statement is to be signed and completed by the investor rather than be certified by a third party e.g. an accountant.
  • All communications made under the exemptions are to be accompanied by disclosure that includes the name, address (or email), and company number of the person making the communication, or the person on whose behalf the communication is made (the investee company).

The new rules came into effect on 31 January 2024 and there are no transitional provisions in place. However, if an initial financial promotion has been made before 31 January 2024, there is a 12-month period in which follow-up communications will be permitted under Article 14 of the FPO (by or on behalf of the same person in relation to the same investment).

What is the impact?

Hopefully it doesn't come as a surprise, but promoting an upcoming fundraising round or pitching to private individual investors is likely to constitute communication of a financial promotion. Under section 21 of the Financial Services and Markets Act 2000, it is a criminal offence for an unauthorised person to communicate a financial promotion unless they are exempt or the financial promotion is approved by a person authorised by the Prudential Regulation Authority or Financial Conduct Authority. It is therefore important that an exemption under the FPO can be relied on when making such communications, otherwise it could amount to a criminal offence. 

Going forward, when looking to rely on the high net worth individual and self-certified sophisticated investor exemptions, care needs to be taken to ensure that the correct template statements are being used and the relevant risk warnings with disclosures are included on any of your promotions e.g., investor packs and offer documents. This also applies to live interactions with potential investors.  

Please make sure that you have appropriate policies and procedures in place so the updated requirements are complied with, relevant employees are made aware and assessments are undertaken to ensure that your targeted investor population meets the new criteria. 

]]>
{4F4D2CDA-324A-4491-BF68-60D60706CDB6}https://www.rpc.co.uk/perspectives/rpc-big-deal/what-do-your-corporate-governance-leads-need-to-know-about-tackling-greenwashing/What do your corporate governance leads need to know about tackling greenwashing?Mon, 13 Nov 2023 10:35:00 ZRPC big dealPhoebe Nowell-UstickeThere is no shortage of stories concerning companies mishandling their promises and responsibilities in relation to tackling climate change. One of the key issues is "greenwashing", which is when a business makes a claim about its environmental efforts without merit. Last year RPC published a blog outlining practical steps businesses can take to prevent greenwashing. In this blog, we summarise the key takeaways from the CGI's report on tackling greenwashing from a corporate governance perspective.

The report illustrates how greenwashing can be seen as a corporate governance issue, and not simply a marketing or public relations one. What's more, regulation in this space is now under constant development, and there is a growing expectation that corporate governance professionals need to have a thorough grasp of the regulatory landscape and possible repercussions associated with greenwashing.

Greenwashing as a corporate governance and board issue

Good corporate governance now includes ensuring that your board is adequately trained and prepared to identify and address possible greenwashing within your organisation. In support of this, the CGI's report states that "organisation-level governance factors have been demonstrated to be more important for the avoidance of greenwashing than country factors (such as public scrutiny)". The CGI's report set out three principles for action to assist in avoiding a disconnect between an organisation's sustainability messaging and its actions:

  1. Produce high-quality, transparent disclosures: If you are required to make disclosures, make sure that you use reputable reporting frameworks and ensure that your targets are science-based. Perform a materiality analysis and select relevant and specific metrics for your key performance indicators (KPIs). Be transparent in your claims and disclosures and avoid vague claims or claims that solely focus on the good without recognising the challenges faced by your organisation in addressing relevant environmental issues. 
  2. Increase board capacity and guarantee robust oversight: Provide relevant training and resources for your board in relation to climate change and other environmental issues and put greenwashing on the agenda for your board and committee meetings (ensuring that relevant people in your organisation are involved so your organisation can get a full picture). If it is your responsibility to manage corporate governance within your organisation, make sure you clearly understand how to oversee and monitor environmental and other sustainability related claims. If your organisation's methods are not up to scratch, make plans to improve them. You may need to employ internal or external oversight procedures for your processes and procedures. Consider whether a specific committee should be established to monitor climate and sustainability issues.
  3. Implement change and create accountability: After careful consideration of where your environmental risks and responsibilities lie, your board should look to develop a climate strategy (if it hasn't already) for the short, medium and long-term. Strategy alone will not be sufficient: implementation of practices to assist in achieving these goals will demonstrate an intention to succeed, as well as bringing your organisation closer to achieving its climate goals. Publish regular reports on your organisation's progress (whether year on year, or against your peers). 

For further guidance from CGI, see their full report here on tackling greenwashing from a corporate governance perspective.

Regulation of greenwashing

The consequences of greenwashing could be severe, particularly in the everchanging regulatory landscape. Whilst scrutiny from regulators in relation to environmental risks has been largely focussed on public companies and large private companies, it would be prudent for smaller private companies to ensure they are up to speed and compliant. Corporate governance professionals should therefore heed the advice of the CGI and seek to implement a broad range of strategies against greenwashing.

The regulatory landscape in respect of greenwashing is currently a patchwork, with no single body regulating sustainability claims. However, the CGI contends that further guidance, regulation and legislation preventing greenwashing will arise in future, with cohesion between jurisdictions being a focus in the compliance sector. 

The key regulators for greenwashing in the UK are the Competition and Market Authority (CMA), the Advertising Standards Agency and the Financial Conduct Authority. Regulatory requirements to report against the UK Green Taxonomy are also expected to be introduced. Whilst the current view is that the cost of greenwashing appears to be largely reputational, further enforcement action as well as civil penalties appear to be on the horizon.

The CMA published its Green Claims Code in 2021, which assists businesses in ensuring their environmental claims are consistent with consumer protection legislation. The CGI report notes that the Digital Markets, Competition and Consumers Bill seeks to provide further enforcement muscle for the CMA. Most notably, the bill (which is currently at the report stage in the House of Commons) would allow for substantial penalties against those engaging in greenwashing practises which breach consumer protection law (such penalties not exceeding £300,000, or if higher, 10% of the annual turnover of the respondent).

]]>
{9A39ECAC-DE86-42A7-949E-E977D5C3D2E7}https://www.rpc.co.uk/perspectives/rpc-big-deal/economic-crime-and-corporate-transparency-act-what-you-need-to-know-about-the-reforms/Economic Crime and Corporate Transparency Act – what you need to know about the corporate transparency reformsMon, 06 Nov 2023 14:10:00 ZRPC big dealRosamund AkayanThe Economic Crime and Corporate Transparency Act 2023 (the Act), which received Royal Assent on 26 October 2023, represents the most significant change to the role of Companies House in its long history.

The Act gives Companies House new powers to query, remove and reject information submitted to it and more effective investigation and enforcement powers (including the ability to cross check data and share information with external bodies), enabling it to become a more active gatekeeper over company incorporations and a custodian of more reliable data.

Corporate transparency reforms

In addition to expanding the role and powers of Companies House, the Act introduces far-reaching corporate transparency reforms which will affect every UK company, with similar reforms to be introduced for limited partnerships and LLPs.

These include:

Identity verification

All new and existing directors, people with significant control (PSCs) and persons submitting information to Companies House will be required to verify their identity. Details of the verification process will be contained in as yet unpublished regulations. There will be two methods of identity verification: direct verification via Companies House, which will link a person with a primary identity document, such as a passport or driving licence, and an indirect route through an Authorised Corporate Service Provider (ACSP) supervised for the purposes of money laundering regulations and authorised by the registrar to verify their identity.

Once the identity verification provisions come into force, proposed directors of new companies will need to be verified before the company is incorporated. New directors of existing companies will be required to verify their identities before their appointment is notified to Companies House (which must happen within 14 days of appointment). Companies House will contact new unverified PSCs to require verification. There will be a transition period to provide existing directors and PSCs time to verify their identities, but this is expected to be required by the time of the company's first confirmation statement following commencement of the provisions.

Verification is expected to be a one-off exercise for each individual, regardless of the number of companies in relation to which they require identity verification, with reverification only required in a very narrow range of circumstances such as where fraud is suspected.

Directors and PSCs who do not verify their identity will commit a criminal offence, as will companies with an unverified director (and every officer of the company). In addition, incorporation of any new company without verified directors will be rejected and individuals whose identities are not verified will be unable to continue to file information on behalf of companies. The company register may be annotated to show that an individual is unverified and unverified directors could be prohibited from acting as a director. However, failure to verify a director's identity will not affect the validity of that person's acts as director.

Ban on corporate directors

Alongside the provisions of the Act, the government is planning to bring into force a restriction in the Companies Act 2006 on the use of corporate directors for UK companies. Corporate directors will be prohibited unless all the directors of the corporate director are natural persons and, prior to their appointment as directors of the corporate director, all of those natural person directors have had their identities verified.

Companies with corporate directors will be given 12 months to ensure their corporate directors are compliant with the conditions or have them resign. New companies or companies appointing a new corporate director must ensure they satisfy these conditions from the date the measure comes into force.

Company registers

A company's register of members will be required to include shareholders' full names (not just initials and a surname) and a service address for each shareholder.

Companies will no longer be required to keep their own registers of directors, directors' residential addresses, company secretaries and PSCs, although they will still be required to file the relevant information with Companies House.

In relation to PSCs, the government intends to collect and display more information from companies claiming an exemption from the requirement to provide details of their PSCs, including the reasons for the exemption, and any conditions satisfied to allow a relevant legal entity (RLE) to be recorded as a PSC including, if listed, which market the RLE is listed on.

Email address

Each company must provide an "appropriate" email address to Companies House, meaning that emails sent to the email address by Companies House would, in the ordinary course of events, be expected to come to the attention of a person acting on behalf of the company. The email address will not be made publicly available.

Registered office address

Each company must also ensure that its registered office address is "appropriate", meaning that documents sent to the registered office address would, in the ordinary course of events, be expected to come to the attention of a person acting on behalf of the company and be capable of being recorded by the obtaining of an acknowledgement of delivery.

Companies House will have the power to change a company's registered office address where it is satisfied that the company is not authorised to use the address and will be able to impose more stringent sanctions on those failing to provide an appropriate registered office address.

Confirmation statements

At the time of the first confirmation statement after the legislation comes into force, existing companies will be required to deliver to Companies House a one-off shareholder list, the company email address and confirmation that all directors have had their identities verified.

In addition, at the time of each annual confirmation statement, companies will be required to deliver a statement that the intended future activities of the company are lawful.

Incorporation requirements

On incorporation of a new company, the subscribers will be required to confirm that they have not been disqualified as directors and that the company is being formed for a lawful purpose. The first directors must have had their identities verified and the company formation agents must be approved by Companies House as ACSPs before forming new companies or making filings.

Filing documents at Companies House

Once the relevant provisions come into force, Companies House will only accept filings from individuals (on their own behalf or on behalf of their employer) who have had their identity verified and confirm that they have authority to file on behalf of the company, or from ACSPs or employees of ACSPs with permission from the company to file on its behalf.

Other reforms

Other reforms introduced by the Act include provisions which will make it easier for prosecutors to pursue companies in the UK for criminal offences, including through the introduction of a new strict liability "failure to prevent" fraud offence and a change to the existing test for attributing liability for economic crime to a company.

When will these reforms take effect?

Most of the Act will be implemented via secondary legislation which is yet to be published and some of the changes, such as the identity verification requirements, will require development of Companies House systems before they are introduced.

However, a new Companies House blog post sets out certain early measures expected to come into force in early 2024, including:

  • The new powers for Companies House to query, remove and reject information provided to it and to share data with other government departments and law enforcement agencies.
  • The new requirements for "appropriate" email addresses and registered office addresses.
  • The new requirements for companies to confirm they have a lawful purpose on incorporation and in subsequent confirmation statements.

The blog post also notes that Companies House will be increasing some of its fees from early 2024 to ensure that they cover the cost of the services it delivers.

]]>
{5D22FDFB-A7BA-49D9-AA85-EC3CBAAF1543}https://www.rpc.co.uk/perspectives/rpc-big-deal/us-to-prohibit-outbound-investment-in-certain-advanced-technologies/US to prohibit outbound investment in certain advanced technologies – a massive expansion of national security lawsTue, 22 Aug 2023 17:04:00 +0100RPC big dealNeil BrownBackground

Against the backdrop of the heightened geopolitical tensions between the US and China, the Executive Order refers to the growing threat to US national security posed by advances in certain "sensitive technologies" which can be used to enhance other countries' "military, intelligence, surveillance, or cyber-enabled capabilities".  The Executive Order specifically refers to China, Hong Kong and Macau as "countries of concern" that are "engaging in a comprehensive, long-term strategy" to develop sensitive technologies "in a way that threatens the national security of the United States".

For several decades, the US has applied the CFIUS regime which restricts inbound investment into certain US assets of national security importance by persons considered to pose a national security risk.  In recent years, other countries have adopted similar legislation such as the UK's National Security and Investment Act.

The new Executive Order introduces a massive expansion of intervention in transactions on national security grounds by prohibiting (or requiring prior approval for) outbound investments by US persons into certain advanced technologies in certain other countries.  

What technologies are affected?

The Executive Order refers to:

  • semi-conductors and micro-electronics:  Western reliance on Taiwanese microchips has been well documented, as has the threat to that supply chain by a Chinese invasion of Taiwan;
  • quantum information technologies: various organisations around the world are investing heavily in quantum computing, which has the potential to create computers so powerful that most security encryption systems could be broken in seconds;
  • artificial intelligence: whilst ChatGPT is not yet the Terminator's Skynet, many are predicting that development of AI will bring about changes more profound than the industrial revolution.

What are the restrictions?

The Executive Order is relatively high level on potential restrictions, and orders that the US Treasury and other relevant US agencies shall produce detailed regulations.  These regulations will identify which transactions need to be notifed in advance and which transactions will be prohibited outright.  

Who is subject to the restrictions?

The restrictions will bind on all "United States persons", which includes:

  • US citizens and residents
  • any entities organised under the laws of the United States (or any jurisdictions within the United States)
  • any overseas branches of such entities
  • any person in the United States.

Such United States persons will also be obliged to ensure that foreign entities under their control will comply with the restrictions.  So this would capture foreign subsidiaries of US holding companies.

What this means

We await drafting of the detailed regulations that will provide more of the detail needed.  But once implemented, these regulations will have a significant extra-territorial effect beyond the borders of the United States.  They will need to be considered by a wide range of people on a wide range of transactions that might be considered to involve investment into the specified advanced technologies in or involving China, Hong Kong or Macau

]]>
{C30D7526-D5B2-4F04-945A-E7DE2957594D}https://www.rpc.co.uk/perspectives/rpc-big-deal/finsbury-food-v-axis/Finsbury Food v AXIS: what are the key takeaways for warranty and indemnity insurers and policyholders?Wed, 19 Jul 2023 10:10:00 +0100RPC big dealCharmaine Chew, Matt WardFor policyholders, it serves as an important reminder that W&I insurance is not designed to mitigate the impacts of a bad bargain in an M&A deal. 

The facts

In August 2018, Finsbury Food Group Plc (Buyer) completed the purchase of Ultrapharm Limited (Target) for £20 million. The Target was a specialist manufacturer of gluten free baked goods, which had benefitted from a recent increase in demand for such products. One of its biggest customers was Marks and Spencer plc (M&S). The Buyer took out a Policy, which insured various warranties given by the sellers to the Buyer in respect of the transaction. 

The Buyer brought a claim under the Policy alleging that certain warranties had been breached, and that these breaches reduced the overall value of the Target's business by £3,194,370.  

Among the key issues to be decided by the court was whether certain recipe changes and product price reductions given by the Target to M&S amounted to breach of the following warranties:

  • that there had been no material adverse change in the trading position of the Target group since the accounts date (Trading Conditions Warranty); and  
  • that, following the accounts date, there were no agreed price reductions or discounts which would materially affect the Target group’s profitability (Price Reduction Warranty). 

The decision

The court found that the recipe changes and price reductions did not breach either warranty. The fact that the recipe changes and price reductions were agreed and took place before the accounts date, and the warranties applied only to events which had occurred "since the accounts date", was crucial to the failure of the claim. The court also held that the recipe changes would not constitute a material adverse change for the purposes of the Trading Conditions Warranty, and recipe changes were part of the ordinary course of a bakery's business.

Further, the court found that even if breach was proved, the Buyer had not suffered any loss, given that it would have proceeded with the purchase of the Target at the agreed price of £20 million in any event. 

Key takeaways 

Material adverse change

Fundamentally, it was held that the meaning of a material adverse change is subject to context and contractual interpretation. In this case, the clause containing the Trading Conditions Warranty also included additional wording that the Target group's business, profitability or prospects had not been adversely affected by the loss of any customer representing more than 20% of the Target group's total sales since the accounts date. The insurers argued that the clause should be read as a whole, with each part consistent with the other parts – as such, in interpreting the meaning of a material adverse change, the reference to "more than 20% of the total sales of the Group Companies" should apply and set the materiality threshold accordingly.

However, the court disagreed with this interpretation, and took the view that the clause comprised several separate and independent warranties instead. As such, the reference to "more than 20% of the total sales of the Group Companies" could not be used to interpret the meaning of material adverse change, since it applied to a separate warranty. The judge determined that, in this case and context, a material adverse change would cause more than a 10% change in the total sales of the Target group, being a sufficiently significant or substantial change over the relevant period of 9 months.

This case highlights the importance of careful drafting when it comes to "arbitrary" concepts like material adverse change. Specifically, consideration should be given to: (i) structuring of warranty wording to avoid confusion as to whether a paragraph comprises a single warranty (and therefore should be interpreted as a whole), or whether it comprises separate warranties (with each separate warranty being interpreted independently of the other(s)); and (ii) whether it is worth defining material adverse change in relation to a specific threshold, for the avoidance of doubt. 

Knowledge

The Policy included a clause which excluded liability of the insurers if the Buyer had actual knowledge of the circumstances of a warranty claim and was actually aware that such circumstances would be reasonably likely to give rise to a warranty claim. Whilst the Buyer’s witnesses submitted they did not have the requisite knowledge, the court found these submissions to be untruthful and as such, even if there had been a breach, the Policy would not respond. Buyers should be advised to account for any known circumstances in the purchase price as they will not be able to retrospectively claim loss for such circumstances under their W&I policy.  

Valuation methodology

The court considered the basis on which the Target was valued to quantify any potential loss suffered by the Buyer. The Buyer had fixed the purchase price at £20 million which was determined by reference to 1 x sales, and so if a breach had been found, the court would have assessed damages on the basis of any reduction in sales (which was assessed at £300,000 at the time). While a more common way to value the Target would be to use an EBITDA figure x a negotiated multiple, this methodology was not used; had it been used, the Buyer could have argued it suffered a greater loss. For insurers, this highlights the importance of determining the methodology used to value the Target early in the insurance process as this will be fundamental to assessing the scale of the loss should a claim arise. 

Final thoughts 

In challenging market conditions, it may be tempting for policyholders to try to recover losses from a bad bargain under their W&I policy. This case serves as an important reminder that the product is not designed for this and courts will be forthcoming in upholding its terms. The case also demonstrates that parties should be cautious when it comes to drafting "arbitrary" concepts such as material adverse change – if there is a specific threshold in mind, consideration should be given to defining "material adverse change" in order to avoid any argument further down the line.  

]]>
{29D9D6A5-AFEC-4CAE-BD6F-9408A8790556}https://www.rpc.co.uk/perspectives/rpc-big-deal/10-practical-tips-for-navigating-the-w-and-i-underwriting-process/10 Practical Tips for Navigating the W&I Underwriting ProcessMon, 12 Jun 2023 14:55:00 +0100RPC big dealCharmaine ChewIntroduction

This article offers 10 practical tips for parties seeking W&I insurance (Insureds) and their advisors when navigating the W&I underwriting process, which broadly comprises 3 main stages: (1) firstly, the Insured engages a W&I insurance broker to obtain insurers' indicative policy terms (also known as non-binding indications (NBIs)), (2) secondly, the chosen insurer proceeds with underwriting, including reviewing the transaction documents and due diligence reports, issuing underwriting questions for the Insured and their advisors, and attending an underwriting call with the Insured and their advisors (as needed), and (3) thirdly, the negotiation of the coverage under the W&I insurance policy. The inception of the W&I insurance policy typically coincides with the signing of the transaction documents.

Timing 

1. Engage a broker early: The W&I underwriting process (from providing information about the deal to policy inception) can take up to 2 to 3 weeks. As such, it is helpful to engage a W&I insurance broker early in the deal timeline, so that the broker can kickstart the W&I underwriting process by approaching insurers for their NBIs. Insurers usually only require the draft sale and purchase agreement (SPA) and information memorandum to provide their NBIs – due diligence reports are not necessary at this juncture. 

2. Keep NBI expiry dates in mind: Insurers' NBIs typically expire 30 days after they are issued. If there is an extension of the deal timeline, inform the broker as soon as possible so that the broker can request for extension of insurers' NBIs as appropriate. 

Due diligence

3. Carry out the appropriate level of due diligence: At minimum, insurers typically expect legal, financial and tax due diligence to be carried out by third party professional advisors. Having said that, all relevant categories of warranties requested to be covered by the W&I insurance policy should be supported by comprehensive and appropriate due diligence, and gaps in due diligence will generally lead to gaps in coverage. For example, if an Insured is acquiring a technology company and is seeking W&I cover in relation to intellectual property (IP) warranties in the SPA, then the subject matter of these IP warranties should be investigated in the due diligence process.

4. Materiality thresholds should align with W&I de minimis threshold: The materiality thresholds applied in the Insured's due diligence should match the de minimis threshold in the W&I insurance policy. This is consistent with the general principle that gaps in due diligence will lead to gaps in coverage – if the due diligence does not pick up issues below a certain amount, then the W&I insurance policy will not do so either.   

5. Internal due diligence will be closely scrutinised: Due diligence carried out by third party professional advisors is generally preferred (especially in relation to legal, financial and tax matters). While it is possible to obtain W&I insurance where due diligence has been carried out internally, insurers tend to closely scrutinise internal due diligence reports, and expect internal due diligence to be carried out by persons with the requisite subject matter expertise. 

6. Be aware that major identified issues are excluded: W&I insurance is intended to cover unknown issues arising from breach of the warranties under the SPA. As such, major identified issues in the due diligence are likely to be specifically excluded by the W&I policy. Insureds should be aware of this, and seek other protection (for example, specific indemnities under the SPA) as may be required. 

Underwriting questions

7. Tackling questions on gaps in due diligence: Insurers may ask underwriting questions in relation to gaps in due diligence, especially where the warranties in the SPA extend to matters which do not appear to have been diligenced. For example, where the warranties in the SPA apply to all subsidiaries of the target company, but the due diligence appears to cover only certain subsidiaries, the insurer may ask an underwriting question around what due diligence has been carried out on the remaining subsidiaries (and if there is none, how the Insured has gotten comfortable with the risk that warranties in relation to those remaining subsidiaries have not been breached). To the extent that there is a commercial rationale available, it is often helpful to include this in the response – in the present example, the Insured may state that the focus of their due diligence has been on material subsidiaries only, and it is not commercially pragmatic to diligence the remaining subsidiaries because they are non-operating and/or insignificant from a revenue contribution perspective.

8. Tackling questions on identified issues: While major identified issues are often excluded by the W&I insurance policy, insurers may still ask underwriting questions around them. For example, insurers may wish to understand whether certain identified issues are indicative of broader systemic issues or poor controls within the target company. When preparing responses to these questions, Insureds should consider factors such as: (i) whether the cause of the identified issue has been properly investigated and remedied, and (ii) whether the identified issue is a recurring event, or a one-off. 

9. Quantify the risk: To the extent possible, Insureds and their advisors are encouraged to quantify potential risks. Insurers may be comfortable without a specific exclusion in relation to an identified issue, if the potential liabilities arising from that issue are shown to be immaterial and/or below the de minimis threshold. 

Underwriting call

10. Insured's deal team should lead the underwriting call: Ideally, the Insured's deal team should take the lead in responding to the insurer's questions during the underwriting call, with the option to defer to the advisors on technical or specific due diligence points. This is so that the Insured can offer its commercial perspective on how it has gotten comfortable around certain issues in relation to the deal; on the other hand, advisors are often limited to responding only from an advisor's perspective, and are confined by their scope of engagement and the information available to them.    

Advisors should be prepared to supplement the Insured's responses, where appropriate. If the requested information is not on hand during the underwriting call, the Insured may follow up in writing after the call. 

]]>
{599D7957-B3C6-4AA7-B632-5020FFA9916E}https://www.rpc.co.uk/perspectives/rpc-big-deal/automatic-conversion-of-shares-held-invalid/Automatic conversion of shares held invalidTue, 30 May 2023 11:57:00 +0100RPC big dealArjun PatelBackground

In the case of Ventura Capital GP Ltd (Ventura) v DnaNudge Ltd (the Company) [2023] EWHC 437 the High Court held that a conversion of preferred shares constituted a variation or abrogation of the special rights attaching to the preferred shares since the consent of the preferred shareholders was not obtained. Ventura had invested £42m into the Company in return for preferred shares and, together with Sumitomo Mitsui Trust Bank, held all of the preferred shares in the Company. 

The preferred shareholders had negotiated valuable rights attached to the preferred shares, reflected in the Company's new articles of association and an amended shareholders' agreement, including a right to a cumulative preferred return on any dividend or capital distribution and a contractual put option pursuant to which they could require the Company to buy back some or all of their preferred shares if the Company did not IPO before November 2023. 

In May 2022, the Company wanted to raise more capital and issued a circular to all shareholders, in which it warned that the potential exercise of the put option by the preferred shareholders could negatively impact the Company’s business. The circular also stated that an Investor Majority (being the holders of a majority of the ordinary shares and preferred shares in aggregate as if such shares constituted one class of shares) could nullify the put option by converting the preferred shares into ordinary shares. Given the number of ordinary shares in issue, ordinary shareholders could constitute an Investor Majority without the need for any preferred shareholders. In June 2022, an Investor Majority comprised of ordinary shareholders informed the preferred shareholders that their preferred shares had been converted into ordinary shares. 

What did the Articles say? 

This case hinged on the interplay between the conversion right in Article 9.2(a) and the protections afforded to the preferred shareholders in Article 10.2. 

Article 9.2 (a) provided that:

'All Series A [preferred] Shares shall automatically convert into Ordinary Shares:

(a) upon notice in writing from an Investor Majority at the date of such notice'

Article 10.1 provided that:

'Whenever the share capital of the Company is divided into different classes of shares, the special rights attached to any such class may only be varied or abrogated … with the consent in writing of the holders of more than 75 per cent in nominal value of the issued shares of that class.'

Submissions

Ventura argued that the conversion constituted a variation or abrogation of the rights attaching to their preferred shares and that Article 9.2 (a) should therefore be read in conjunction with Article 10.1, requiring the written consent of the preferred shareholders. As this consent was not obtained, the conversion should be declared void.   

The Company's principal submission was that the exercise of the conversion right under Article 9.2(a) was not a variation or abrogation but instead an 'exchange' of preferred shares for ordinary shares on a one for one basis. This meant that the rights attached to the preferred shares were not extinguished and, whilst the preferred shares were no longer in issue following the conversion, the Company still could issue shares of this class in the future. The correct question to consider was therefore whether the rights attaching to the class of share had changed, not whether the rights of the holder of the shares had changed. Hence, Article 9.2 (a) should not be subject to Article 10.1 because there had been no abrogation or variation of the rights attaching to the class of preferred shares under the articles. 

High Court's Decision

The court agreed with Ventura's submission that there had been an attempted variation or abrogation of the preferred share rights.
Firstly, the court noted the premium paid for the shares, and stated that it would have been 'apparent' that the premium paid was for the special rights attached to those preferred shares. 

Secondly, in assessing the true meaning of the words in Article 9.2 (a),  the court stated that it must look at the 'reality of the situation'. The reality here was that the conversion sought to extinguish the special rights of the preferred shares and was therefore an attempted variation or abrogation of the preferred share rights. It was immaterial that shares of the same class could still be issued after the conversion. The court rejected the Company's submission that the conversion could have taken effect without the consent of the preferred shareholders and stated that it was 'so obvious that it goes without saying' that no reasonable person reading the articles and knowing how much the preferred shareholders had paid for their shares would interpret the articles as allowing a majority of ordinary shareholders to remove the special rights attaching to the preferred shares.  

As a result of the above conclusions, Judge Hodge KC agreed with Ventura that the following words should be read as inserted at the end of Article 9.2 (a): ‘… subject always to having first obtained the consent required under article 10.1’

Judge Hodge KC was clear that the implied insertion of the above phrase did not reverse the deal struck by the parties originally. Instead, it was giving business efficacy and integrity to the articles as a whole and giving effect to the 'true bargain made between the company and all its shareholders, whereby they always intended that the special rights attached to the preferred shares should enjoy effective protection from any attempt to vary or abrogate them'.

The court therefore declared the purported variation or abrogation of rights attaching to the preferred shares, and hence the conversion, null and void.

Analysis

The key takeaway from this case is that a company's articles should be clear and unambiguous in setting out when and how a conversion right occurs since there is no default conversion mechanism under UK company law. In particular, there should a clear process where a conversion will constitute a variation of class rights and how the conversion right will interact with class consent rights under the articles or section 630 of the Companies Act 2006. If the intention is for a conversion not to require class consent, this should be expressly stated in the articles so as to avoid any potential claims from shareholders who may be impacted. Prospective investors should also be mindful of any of any automatic conversion rights in a company's articles and ensure that any such rights are subject to appropriate class consents.

]]>
{B7287F6F-D166-4BCB-B76A-7D8EE8202362}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-importance-of-complying-with-formal-notification-requirements/Take notice: the importance of complying with formal notification requirementsTue, 23 May 2023 09:45:00 +0100RPC big dealBen MagahyWhen purchasing shares, it is common for buyers to seek and sellers to give warranties as to the shares being acquired and the business of the target company or group. While warranties serve a useful purpose for eliciting the disclosure of information, recovery for breach of warranty has always been difficult.

In particular, the standard practice for share purchases under English law has been for warranty claims to be based on damages for breach of contract – the recoverable loss is, broadly speaking, the diminution in value between the value of the acquired shares if the warranty had been true and the value of the acquired shares on the basis that the warranty is false. For further detail of how losses are assessed, see What's the Damage?

An obvious consequence is that the loss suffered by the target company in relation to a matter that constitutes a warranty breach is not a sufficient basis for the buyer to make a recovery. Rather, the buyer must demonstrate that the warranty breach would have meant a lower value would have been ascribed to the shares had it known of the relevant matter.

Even before reaching the stage of quantifying losses on this basis, which typically requires expert evidence to assess the valuation of the shares, there are hurdles a buyer must overcome to make the relevant claim. A share purchase agreement typically contains provisions limiting the seller's liability for warranty claims (usually by setting a financial cap and a time limit on making claims) and setting out how the buyer may make a valid claim. These provisions are normally carefully negotiated. One of the ostensibly more innocuous provisions is a notification clause, which interacts with the time limit – often this will take the form that if the buyer wishes to make a warranty claim, then it must notify the seller of the alleged breach of warranty before the end of a specified timeframe, and set out certain information relating to the claim. The provisions will often go on to say that having notified a claim, the buyer then has a fixed period within which to issue proceedings or else the claim is extinguished.

In Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings Limited [2023] EWHC 412 (Comm), the High Court highlighted the importance of compliance with a notification clause, with failure resulting in summary judgment being granted in favour of the defendant seller.

Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings

This case concerned the acquisition of a target company under a share purchase agreement. While multiple claims were made, the key claims for the purposes of this blog concerned an option agreement which had been warranted as having been assigned to the target company, which was subsequently discovered not to have been the case. The buyer also had a potential indemnity claim in relation to the same subject matter.

In the High Court, the seller made an application for summary judgment against the buyer on the basis that, the relevant notification clause under the share purchase agreement having not been complied with, the buyer had no reasonable prospect of succeeding on the claim. The relevant notification clause stated:

"In the case of the types of claim detailed below, the Seller shall not be liable for a claim unless the Buyer has notified the Seller of the claim, stating in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer's calculation of the Loss thereby alleged to have been suffered)."

The crucial elements required to be included in a notice of claim under this clause were:

(a)        the nature of the claim; and

(b)        the amount claimed, detailing the calculation of the loss,

in each case, in reasonable detail.

The buyer was further required to issue proceedings within six months following the giving of notice of a claim, or, if its loss was contingent or unquantifiable, within six months from the loss ceasing to be contingent or quantifiable.

The buyer gave a nine-page notice of claim to the seller within the relevant timeframe specified in the share purchase agreement. The notice of claim had been drafted by the buyer's solicitors, setting out the relevant factual background to its claims, specifically referring to the relevant warranties and to the buyer alleging that those warranties had been breached. The notice of claim further stated that while the losses were unquantifiable, the buyer expected losses to fall into certain categories and gave current estimates as to what the losses might be. These included losses suffered directly by the target company, and which it was stated the buyer itself would in turn suffer (implying some arrangement by which the buyer had indemnified or otherwise assumed the relevant liabilities of the target company). The notice of claim did not make any reference to the diminution in value of the shares in the target company, and some of the categories of losses were stated to be estimates of future losses.

Taking the contents of the notice of claim in the round, the Court decided that the buyer had not given reasonable notice of the nature of the claim. It was not sufficient for the buyer to set out that it was making a claim for breach of warranty, but rather, the buyer needed to state how it had suffered loss. That loss needed to be based on a diminution of value, but in the notice of claim the losses referred to were either direct losses of the target company or losses as a result of assumption of liability or indemnity by the buyer, and in some cases, were future losses. Without stating that the claim being made was for diminution of value, the buyer had also not provided reasonable detail of the calculation of the loss. The seller was therefore not in a position where it could understand the nature of the claim being made, and the commercial purpose of the notification clause was not met by the notice of claim it had received.

In a helpful passage, the judgment goes into detail as to the commercial importance of complying with the formal notification requirements in the share purchase agreement:

"The commercial purpose of the notification clause included enabling the recipient to understand the claims being made, including understanding the basis for the amount of the claim; to make such inquiries as it is able, and would wish, to make into the matters relating to the amount being claimed, potentially with a view to gathering or preserving evidence; to assess so far as possible the merits of the claim; and to take into account the nature and scope of the claim in its future business dealings, whether by way of formal reserving or a more general assessment of the potential liability; and potentially to seek to resolve the claim. In order to fulfil those purposes, it was necessary for [the buyer] to state what the basis was of its claim for loss."

Analysis

The notification clause in this case was not overly onerous, and was fairly standard for a share purchase agreement. Failure to comply with that clause was a full barrier to recovery for a warranty claim. This might initially seem harsh, but as the judgment makes clear, the notification provisions do have a commercial purpose and will be construed in that light. This serves as a reminder that even for one of the less contentious parts of a liability package, due care needs to be taken as to the meaning of the words used when drafting the provision. When things go wrong and a claim needs to be made, similar care needs to be taken as to ensuring that a notification complies with the wording of the notification clause and takes account of what commercial purpose the clause seeks to achieve.

When it comes to drafting contracts and notification clauses, sellers and buyers will have different interests. The seller is seeking to limit the circumstances of its liability and may well seek to make the notification requirements as wide as possible – for example, in addition to requiring details of the nature of the claim and the loss suffered, it might also require the buyer to state the grounds of the claim, the matters and circumstances giving rise to the claim, steps taken to mitigate losses, or other specific details. The seller will also likely want to include all types of claims in the notification requirements.

The buyer, on the other hand, is seeking to have a simple set of notification requirements which it can easily follow without inadvertently failing to comply – and if the seller insists on complicated and detailed requirements, then it might seek to state that failure to give reasonable detail should not invalidate notice of a claim. In contrast to the seller, the buyer should wish to limit the notification requirements to warranty claims only.

From either perspective, the importance of getting the words correct can make the difference between a successful claim or defence.

]]>
{2ED0B855-D3FC-46BA-8731-8C8F193F88F7}https://www.rpc.co.uk/perspectives/rpc-big-deal/sustainability-linked-bonds/Sustainability-Linked BondsMon, 24 Apr 2023 14:59:00 +0100RPC big dealESG use of proceeds bonds have traditionally been the focus of the ESG finance market.  These bonds are issued to fund a particular project or activity with an ESG focus. 

Sustainability-Linked Bonds (SLBs) are a more recent product to emerge in the market, and an important difference between SLBs and use of proceeds bonds is that SLBs are general purpose bonds and do not necessarily have to be used to fund ESG-related activity.  Instead, the sustainability element comes from a link in the characteristic of the bond (usually pricing) to specified ESG metrics, and the bond will be adjusted to recognise an issuer's good, or poor, performance in relation to its goals.

This opens the market up to issuers who may not have a particular ESG-focused project in mind, or may not operate in a traditionally sustainable sector, but do want to transition towards a more sustainable position.   These instruments are forward looking, and act as a commitment by an issuer to meet certain sustainability targets within specified timeframes. 

The SLB Principles, voluntary principles published by the International Capital Market Association, are as follows:

  1. Selection of Key Performance Indicator (KPI), which should be material to the issuer's sustainability strategy and measurable. Examples of KPIs include level of water consumption, or particular diversity and inclusion targets.
  2. Calibration of the Sustainability Performance Targets (SPTs), which should be ambitious and represent a material improvement to the issuer's position, rather than a 'business as usual' trajectory. Examples of STPs for the KPIs mentioned above include a reduction in water consumption to a particular volume, or reaching a certain percentage of diversity and inclusion targets within a workplace, for example the number of women on a board.
  3. Bond characteristics, being the impact on the bond once a certain trigger event has occurred, for example an increase in the bond coupon if the SPT has not been met. This should be a meaningful change to the original bond characteristics, so that if the bond were to change, there would be a real impact on the issuer.
  4. Reporting on performance of the SPTs, which should be transparent and frequent, and accessible to investors.
  5. Verification, which should be external and independent, measure the issuer's performance as against the SPTs and made publicly available.Pre-issue verification is recommended and verification post-issuance is mandatory.

Although voluntary, an issuer's adherence with the SLB Principles can give investors a level of comfort that the investment is in fact sustainable, and the requirement for external verification is a helpful tool against greenwashing.  As mentioned above, the emergence of SLBs has resulted in more issuers being able to participate in the ESG finance market.  However, they do come with challenges which need to be kept in mind. A key challenge is the general use of proceeds, which means, unlike green bonds, proceeds from SLB issuances can be allocated towards projects or expenses that do not necessarily align with ESG goals.  This means investors may need to conduct more due diligence on issuers to be comfortable before investing.  In addition, if the KPIs are not material to the issuer's business or the SPTs are not ambitious enough, then the sustainable nature of the bond itself can be questioned. 

As the SLB market develops, we may see a shift in the level of regulation to address these challenges.  The EU has recently announced a proposed EU Green Bond standard, which would impose certain requirements on issuers to issue EU Green Bonds.  According to reporting from Environmental Finance, the EU has also agreed to bring in regulation for SLBs within the next three years1.

]]>
{7A4A750E-425A-4AB5-B6DE-DB84E96AA2C4}https://www.rpc.co.uk/perspectives/rpc-big-deal/key-takeaways-from-the-first-year-of-the-national-security-regime/Key takeaways from the first year of the national security regimeWed, 22 Mar 2023 11:17:00 ZRPC big dealBridget LockhartIn January 2022, the UK introduced a new foreign investment regime under the National Security and Investment Act 2021 (Act).  This allows the government to call in qualifying acquisitions for review and either block, impose conditions on, or unwind the transaction if necessary and proportionate to manage national security risks.

There has been uncertainty as to how the government will exercise its new powers under the regime.  However, the cases from the past year provide an early indication of the frequency and extent to which the government intends to exercise its powers.

Transactions that have been blocked / unwound

To date, three transactions have been prohibited under the Act, and two have been unwound.  One early trend is as follows:

  • Acquirer risk: In all cases, the acquirer / owner of the sensitive assets was connected to a politically sensitive state (four connected to China and one connected to Russia).

Other points to note are:

  • Military or dual use technology: Two cases involved the acquisition or use of "military or dual-use technology" (i.e. technology which could be used for both civil and military purposes).In these cases, the Secretary of State considered there was a risk that technology could be exploited to build "defence or technological capabilities" for a politically sensitive state.

  • Broadband:The Government ordered a Russian investment company to sell its entire shareholding in a UK broadband provider business, again citing national security concerns.

  • Unwinding transactions:The government is willing to use its powers to "call in" and unwind transactions that have already completed.Twice since the start of the regime, existing overseas owners have been required to sell their stake in a UK business (in each case, within a certain timeframe and in a prescribed manner).

Use of conditions to manage risks

The Government has also been willing to impose conditions on (rather than block or unwind) a transaction where it considers this is sufficient to manage any potential national security risks. To date, two thirds of the final orders issued under the regime have been conditional clearances.

Typical conditions relate to:

  • Protection of information:Early decisions show that the government is willing to allow transactions to proceed provided the relevant overseas entities agree to implementing security measures to protect sensitive information, technology, and IP from unauthorised use.This includes requiring the acquirer to carry out security audits by a government approved auditor or implementing processes to restrict the sharing of information.

     

  • Government oversight:In several cases, transactions have been allowed to proceed on the basis that there is continued government involvement or oversight in relation to the operation of the target UK business.For example, one case required the acquirer to appoint a Chief Information Security Officer approved by the Secretary of State, and another required the appointment of an HM Government Observer to the board of the subsidiary of the UK target.

Further information

See RPC's blog post for a brief summary of the new national security regime.

]]>
{63A72C1F-3F44-4B81-9F8A-E2E2BFD907EA}https://www.rpc.co.uk/perspectives/rpc-big-deal/spring-budget-2023-main-tax-announcements/Spring Budget 2023 - Main Tax AnnouncementsThu, 16 Mar 2023 11:03:00 ZRPC big dealBen RobertsThe Chancellor, Jeremy Hunt, delivered his first Spring Budget on Wednesday.

The main business and personal tax announcements made by the Chancellor are summarised below. Some of these had been expected (as they had been announced either at last year's 'mini' Budget by Kwasi Kwarteng, or subsequently as a result of the reversal of some of those announcements, or as part of the 2022 Autumn Statement delivered by the current Chancellor). Some of these are brand new measures.

Corporate taxes

1. As expected, the main rate of corporation tax from 1 April 2023 will increase from 19% to 25%.

2. For large groups with over EUR750mn global revenue, for accounting periods beginning on or after 31 December 2023 (and to implement the G20 / OECD's 'Pillar 2' international tax proposals):

  • UK-headquartered multinational groups will be required to pay a 'top-up' tax where their foreign operations have a local effective tax rate of less than 15%.
  • A domestic 'top-up' tax will be introduced where UK operations have an effective tax rate of less than 15%.

3. As previously announced, a new (temporary) 45% Electricity Generator Levy applies from 1 January 2023 to exceptional electricity generation receipts arising to corporate groups with more than 50,000 MWh of in-scope generation per annum. It applies to wholesale receipts for electricity in excess of a benchmark price of £75 per MWh.

4. Capital allowances: full expensing. Companies incurring qualifying expenditure on the provision of new plant and machinery on or after 1 April 2023 but before 1 April 2026 will be able to claim one of two temporary first-year allowances. These allowances are:

  • a 100% first-year allowance for main rate expenditure – known as 'full expensing'; and
  • a 50% first-year allowance for special rate expenditure.

5. The 'temporary' annual investment allowance (AIA) of £1m for qualifying plant and machinery expenditure has been made permanent (it was due to revert to £200,000 in April 2023). The AIA provides for 100% tax relief by way of capital allowances.

Share schemes

6. From 6 April 2023, qualifying companies will be able to issue up to £60k of tax-qualifying company share option plan (CSOP) options to employees, double the current £30k limit.

7. From 6 April 2023, measures will take effect to 'simplify' the EMI scheme legislation. They relate to the contents of the EMI option agreement document:

  • The requirement to set out the details of any 'restrictions' on the shares under option, is being removed.
  • The requirement to declare that the employee has signed a working time declaration, is being removed (note that the working time requirement itself is not being removed).

8. From 6 April 2024, the grant of EMI options will no longer need to be notified to HMRC within 92 days (instead, the deadline for notification will be 6 July following the end of the tax year in which the options are granted).

Pensions 

9. The pension Annual Allowance (the maximum amount of pensions savings that an individual can make each year with tax relief without incurring a tax charge) will be increased from £40k to £60k, from 6 April 2023.

10. The pension standard Lifetime Allowance (the maximum amount of tax relievable pension savings an individual can benefit from over the course of their lifetime) charge will be abolished from 6 April 2023 and the Lifetime Allowance will itself be abolished in due course.

Other measures

11. Investment zones: the government will establish 12 Investment Zones across the UK, subject to successful proposals. Each zone will have access to interventions of £80 million over 5 years. Once designated, 'special tax sites' in or connected with these zones will benefit from a package of tax reliefs including SDLT relief, enhanced capital allowances for plant and machinery, enhanced structures and buildings allowances, and secondary Class 1 National Insurance contributions (NICs) relief. The reliefs will be time limited with the exact end date confirmed at a future date.

12. From 6 April 2023 the amount of investment that companies will be able to raise under the SEIS scheme will increase from £150k to £250k. To enable more companies to use the SEIS scheme, the gross asset limit will be increased from £200k to £350k and the age limit on a qualifying trade from 2 to 3 years. To support these increases, the annual investor limit will be doubled to £200k.

13. From 6 April 2023, the REIT rules will be relaxed. The amendments will relax the requirement for a REIT to own at least three properties where a REIT owns at least one commercial property worth £20 million or more; and amend the rule for disposals of property within three years of significant development work.

14. As expected, it was confirmed that the Office for Tax Simplification is to be abolished, after 12 years of mixed results. The stated intention is for tax simplification to be "embedded" into the institutions of government. 

 
]]>
{934F8CFC-4ED4-4031-9443-4BEED867EAE1}https://www.rpc.co.uk/perspectives/rpc-big-deal/say-on-climate-resolutions/Say on Climate resolutionsWed, 08 Feb 2023 13:59:00 ZRPC big dealChloe Clapson, Connor CahalaneWhat are climate transition plans?

A climate transition plan is an action plan which sets out how an organisation proposes to change its existing assets, operations and/or business model to align with the latest and most ambitious climate science recommendations, which include halving greenhouse gas (GHG) emissions by 2030 and reaching carbon net-zero by 2050. As part of the recommended disclosures of the Task Force on Climate-related Financial Disclosures (TCFD), businesses are encouraged to disclose their transition plans. In April 2022, HM Treasury set up the Transition Plan Taskforce to develop disclosure standard for private sector climate transition plans.

Why are investors calling for Say on Climate resolutions?

As the volume of climate-related legislation and regulation directed at business increases, investors are calling for better disclosure from the companies in their portfolios on whether their business model and operations are compatible with the rapid move towards a low carbon or net zero economy. While disclosure of climate transition plans is recommended by climate related disclosure standards, such as those of the TCFD, many listed companies have not yet published their plans or have published plans which are short on detail and vague on commitments to reduce their carbon footprint. 

While the requirements and priority of each institutional investor can differ, common themes arising from recent Say on Climate resolutions include calling on listed companies to:

  • set out specific targets for greenhouse gas emissions reduction over time;

  • improve emissions related disclosure;

  • improve reporting on the effects of climate change on the business, through both the impacts caused and also the financial risks; and

  • align their corporate behaviour with the Paris Agreement target of achieving net zero carbon emissions by 2050.

Who can propose Say on Climate resolutions?

While for UK listed companies, resolutions for the annual general meeting (AGM) are typically proposed by the board of directors, resolutions can also be proposed by any shareholder holding over 5% of the company's voting rights, or by 100 or more shareholders (holding an average of at least £100 of paid-up share capital per shareholder), provided such proposed resolutions are not ineffective, defamatory, frivolous or vexatious.

Are Say on Climate resolutions binding on the company?

The general position for UK companies is that decisions relating to the day-to-day management of the business are for the board and the shareholders cannot interfere with these decisions. This is typically the case even if the majority passes a resolution proposing to direct the board to act in a certain way (unless the company's articles of association provide otherwise). As a result, Say on Climate resolutions are generally not binding and are only advisory in nature. However, they can nevertheless play a significant role in determining a company's future strategy in relation to climate change.

Board and shareholder proposed Say on Climate resolutions 

Board proposed resolutions 

In a recent paper published by proxy advisory firm, the Institutional Shareholders Service (see 'The Rise of Say on Climate Proposals'), it was reported that there were 24 board proposed Say on Climate resolutions for UK listed companies in 2021, with this number increasing to over 40 in 2022.  Shareholder support for board led proposals has been strong, with 75% of proposals receiving shareholder approval of 87% or higher.  

Shareholder requisitioned resolutions 

The number of Say on Climate resolutions requisitioned by shareholders of UK listed companies has increased from 30 in 2020 to 58 in 2021 to over 74 in 2022. Though the number of shareholder requisitioned proposals is steadily increasing, the same cannot be said for the average support level. Between 2020 and 2022 the average shareholder support level for these resolutions has been between 26% and 35%.

Whilst in many instances shareholder requisitioned resolutions have not been passed at the AGM, they are being used as a tool to raise the profile of climate change issues at board and shareholder level. For this reason, it may be expected that numbers of shareholder requisitioned proposals will continue to increase as investors and other stakeholders push for businesses to adapt their climate change strategies. 

What can boards of listed companies do? 

It seems likely that investor pressure on companies to set out proposals to combat climate change will continue to increase. Therefore, boards of listed companies may wish to take proactive steps to tackle these issues, including putting forward their own Say on Climate resolutions for shareholders' approval.  Doing so would not only signal positive engagement and help to build trust, but may also help to pre-empt any shareholders activist proposed resolutions, and a possible loss of control of communication of strategic direction by the board.  

]]>
{A7927D2E-272F-46A3-9F0E-474CEFCA0DD9}https://www.rpc.co.uk/perspectives/rpc-big-deal/change-in-control/Change in ControlMon, 16 Jan 2023 14:13:00 ZRPC big dealWhitney SimpsonAs early as possible in a corporate transaction, you or one of your team should check the Financial Services Register (the "FCA Register"). The FCA Register will reveal whether or not the entity or one of the entities in the group you are purchasing is an Prudential Regulatory Authority ("PRA") and/or Financial Conduct Authority ("FCA") authorised firm, the Buyer (and to a certain extent the Seller) will need to consider the Change in Control Regime under Part 12 of the Financial Services and Markets Act 2000 ("FSMA"). 

What is the Change in Control Regime?

Part 12 of FSMA sets out that persons who decide to acquire or increase control (i.e. changes in shareholding or voting rights above a certain threshold) in an authorised firm are obligated to notify the appropriate regulator of the proposed changes in control in that business.  This notification must be sought prior to the change in control in order to seek the FCA's prior approval.  It is a criminal offence if such persons proceed with the acquisition or increase in control without notifying or receiving approval from the appropriate regulator.  The process of notifying is contained in section 178 of FSMA.  

In addition, any authorised firm that is subject to a change in control must notify the appropriate regulator about the change in control, and then also make a notification when the change of control has taken place. 

This means that in practice if there is a change in ownership contemplated as part of a group restructuring, public takeover or private acquisition, approval must be received from the regulator before completion can take place. 

When does the Change in Control Regime apply?

By way of reassurance, not all changes in control will need to be notified to the appropriate regulator.  Banks, insurers, payment/electronic money institutions and investment firms follow the approach taken in the EU qualifying holdings regime under the Acquisitions Directive, which means that a person with a 10% (20%; 30%; or 50% or more) holding will be considered a controller.  

For firms referred to as non-directive firms e.g. insurance intermediaries, consumer credit lenders the threshold for a controller is 20% or more. While limited permission consumer credit firms have a threshold of 33%. 

Since 11 August 2022, registered cryptoasset firms also fall within the change in control regime if 25% or more of the business is being acquired.  

Some authorised firms fall outside of the regime such as, open-ended investment companies, UCITS qualifiers and sole traders, and others benefit from an adapted version like fund managers. 

Which regulator is deemed to be the appropriate regulator?

The regulator who you will submit your section 178 notification to will depend on whether the authorised firm is authorised by the PRA or the FCA. If the firm is authorised by the PRA, the appropriate regulator is the PRA and for all other firms, the appropriate regulator will be the FCA. 

A section 178 change in control notification 

The obligation to complete and submit a change in control notification is on the Buyer, with the notification being made using the forms specified by the appropriate regulator.  The obligation is triggered once the Buyer "decides" to acquire or increase control over an authorised firm.  This generally means once a decision has been made. In the context of a share purchase sale, the FCA guidance states that notification will not usually be requires before the Buyer enters into an SPA, with the SPA including a condition to obtain change in control approval before the transaction completes.

The FCA's forms are on its notification forms webpage and the PRA forms on its change in control webpage.  There are specific forms depending on the Buyer's legal status e.g. corporate controller form for limited company and limited liability partnership.  In addition, the form will be supported by a number of supplemental documents.  Once completed, the section 178 notification should be sent to the appropriate regulator via email to the allocated email address set out on the PRA and FCA webpages.  

Assessment period

The date the appropriate regulator acknowledges receipt marks the start of the assessment period. The appropriate regulator has 60 working days but if can interrupt the assessment period should it require further information and extend the assessment period by a further 20 working days. This interruption will "stop the clock", meaning that the assessment period will not start to run again until the appropriate regulator has received the information it requires.     

Over the past few years, experience has shown that the regulators, particularly the FCA, have found it difficult to process notifications in a timely manner and some clients have found themselves waiting more than 6 months for approval.  The FCA has acknowledged this and provided updates to its own webpages relating to delays in allocating notifications. A December 2022 update to the FCA's website is now showing that notifications should be taking between 2 to 4 weeks to allocate to case officers. We are starting to see progress on this and will continue to monitor this issue.

Some Top Tips when it comes to change in control notifications

  1. What if there is more than one prospective controller?  If there is more than one prospective controller a notification must be submitted for each but there is no need to duplicate information already provided in another form.  One controller form can be treated as the base document and then there is opportunity to indicate on the other forms that this information is contained in that base document.  
  2. Is a business plan needed? This obligation applies to individual, partnership and corporate controllers.  In addition, not all thresholds will trigger a business plan so make sure that you review the form carefully to see whether or not you need to account for the drafting of a business plan.  If a business plan is needed, make sure that it covers all minimum requirements noted in the section 178 form and provides sufficient detail on these areas.  You will ideally want to compile some of this information in cooperation with the authorised firm or its parent.  
  3. Allow for sufficient time in your transaction plan as there could be delays to your schedule if the application is deemed incomplete. You should also factor in the time it takes to complete, submit and wait for the appropriate regulator's assessment when agreeing the Long Stop Date in the Purchase Agreement.  
  4. In the Purchase Agreement, ensure that it contains conditions that need to be satisfied which set out the change in control process, Seller/Buyer obligations, each parties roles and timing expectations.  Completion of the Purchase Agreement should be conditional on receipt of the appropriate regulator's approval. 
  5. Can a section 178 notification be submitted before a Purchase Agreement is signed?  Yes, it is possible to submit a notification prior to signing the Purchase Agreement with the Buyer enclosing a copy of the draft agreement.  However, the appropriate regulator may consider that the notification is incomplete or require it to be furnished with the final form of the Purchase Agreement in order to conclude its assessment period to ensure it has the full measure of the transaction.
  6. What happens if the appropriate regulator requests further information?  If you receive requests for further information from the appropriate regulator, make sure that you respond to these as quickly as possible within the deadline set by the regulator.
]]>
{376E7A75-3E06-4F55-9342-B3B9B09FA336}https://www.rpc.co.uk/perspectives/rpc-big-deal/emi-schemes-and-use-of-board-discretion-new-hmrc-guidance/EMI schemes and use of board discretion: new HMRC guidanceThu, 03 Nov 2022 17:31:00 ZRPC big dealBen RobertsLast month HMRC published new guidance intended to clarify how the use of board discretion provisions in enterprise management incentive (EMI) option scheme documents can affect the tax treatment of EMI options. The risk is that a decision by the board to exercise discretion may, in some cases, result in the share option being treated as released and regranted. This can result in the loss of the (extremely favourable) tax benefits that the EMI scheme was designed to deliver.

It is not unusual for EMI scheme documents to include provisions to allow for the exercise of board discretion in specified circumstances, in the interest of commercial flexibility. Common examples include to allow for 'good' leavers to still exercise their options, or to allow for 'accelerated' vesting of options, in either case in specific scenarios and subject to particular requirements.

What the new guidance helpfully does is to set out some key principles, together with examples drawing on commonly-encountered scenarios, to illustrate when HMRC might regard an exercise of board discretion as:

  • being 'allowable' in the sense that the exercise of discretion will not, of itself, cause the EMI scheme tax benefits to be lost

vs

  • resulting in the release and re-grant of the share option

Importantly, the new guidance states that this does not amount to a change in HMRC's position. However, HMRC do say they are aware of some cases where taxpayers have been given incorrect advice by HMRC such that in reliance of that advice tax and NICs have been deducted on exercise of options (when, in fact, no such deductions were required). HMRC are encouraging taxpayers to contact them if they feel they have been given incorrect advice by HMRC in the context of board discretion.

The guidance should be of interest to companies looking to adopt EMI schemes, companies with existing EMI schemes containing board discretion provisions, and companies that have allowed exercise of EMI options in the past through the use of board discretion. 

The guidance is available here.

Key principles

The EMI legislation sets out the 3 'fundamental' terms that must be set out in a written EMI option agreement:

  1. he number of shares under option
  2. the exercise price per share
  3. when the option may be exercised

The new HMRC guidance states that a board discretion provision does not, of itself, cause the option to cease to be EMI qualifying. An exercise of board discretion that results in an amendment to any of these fundamental terms is, however, likely to result in the option being treated as released and regranted (unless the amendment has 'minimal' effect).

HMRC examples

The examples contained in the new HMRC guidance are illustrated below. The 3rd fundamental term referred to above ('when' the option may be exercised) is the focus of these examples.

 

'Allowable' use of discretion

 

 

Use of discretion resulting in potential loss of tax benefits

 

Exit-only scheme

'Good leaver' prior to exit. Board permits exercise and allows for accelerated vesting.

 

Discretion on both counts specifically provided in EMI agreement from outset.

 

 

Option-holder leaves before 'exit' event and before option fully vested. No good leaver provisions in EMI agreement.

 

Board uses discretion to allow leaver to exercise and to accelerate vesting.

 

Use of discretion changes 'when' the option can be exercised, even though board has discretion to permit option to be exercised before 'exit' (just no specific good leaver provisions).

 

 

Company receives 3rd party investment, resulting in 3rd party acquiring 25% of the company's share capital. Not a "change of control" as defined for 'Exit' purposes.

 

Board uses discretion to allow exercise (as EMI agreement included discretion for exercise earlier than on defined 'exit').

 

Use of discretion changes 'when' option can be exercised.

 

Time-based scheme

'Good leaver' prior to full vesting. Board permits exercise and allows for accelerated vesting.

 

Discretion on both counts specifically provided in EMI agreement from outset.

 

Board exercises discretion to 'bring forward' when option becomes fully vested. EMI agreement gives Board discretion to amend the vesting schedule.

 

Amendment changes 'when' the option can be exercised.

 

Time-based scheme PLUS performance conditions

Board exercises discretion to change (1) the rate at which the option vests and (2) the performance conditions.

 

'When' the option can be exercised has not changed.

 

 

Board exercises discretion to make the option 'fully' exercisable after 36 months, rather than after 48 months as per the original vesting schedule. EMI agreement gives Board discretion to amend the vesting schedule.

 

Amendment changes 'when' the option can be exercised.

 

'Good leaver' prior to full vesting. Board permits exercise and allows for accelerated vesting. Board also decides to reduce the performance condition target.

 

Discretion on all counts specifically provided in EMI agreement from outset.

 

 

 

]]>
{0D16D6FA-2BB8-44EF-B36C-609DF1B4BB30}https://www.rpc.co.uk/perspectives/rpc-big-deal/when-is-a-director-personally-liable-for-a-companys-wrongs/ When is a director personally liable for a company's wrongs?Fri, 28 Oct 2022 12:06:00 +0100RPC big dealBen MagahyIntroduction

One of the foundational principles of company law is that of separate legal personality, that the company is recognised as a legal person capable of entering legal relationships in its own name. Coupled with this principle is that of limited liability of members, with members being liable only for the amount unpaid on their shares in the case of a company limited by shares. As a result, claims for wrongs committed by a company ought to be brought against the company and not its shareholders, directors or other officers.

It is also well-established that a director's duties are owed to the company, and that therefore where a director has breached those duties it is the company which has a claim against the director. Where a director's breach of duty has resulted in the company causing loss to a third party, then the chain of liability is from the company to the third party, and from the director to the company – as a starting point, there would be no direct liability from the director to the third party.

Notwithstanding this general position, there are numerous circumstances where liability for a company's actions can extend beyond the company – most obviously, where the director has been involved in fraudulent or other dishonest action on the part of the company, then the corporate structure will not protect that director from personal liability. 

A more difficult area arises in cases where the company causes losses to third parties for tortious acts (or civil wrongs) where the wrongdoing is below that of fraud or dishonesty. In some circumstances, directors may be required by law and regulation to take on personal liability to third parties, such as when a director takes on responsibility for the contents of a prospectus under the Financial Services and Markets Act 2000 regime. For the most part, however, the liability will be that of the company and not its directors. A recent decision of the Court of Appeal, Andrew James Barclay-Watt & Others v Alpha Panareti Public Limited, Andreas Ioannou [2022] EWCA Civ 1169, has brought renewed attention on the circumstances where directors may have personal liability for a company's wrongdoing to third parties (including, specifically, by way of accessory liability).

Barclay-Wyatt

Alpha Panareti Public Limited (APP) was involved in the development and marketing of luxury properties in Cyprus. APP faced a number of claims from UK residents who had purchased such properties as "armchair" investments to be let to tourists. As a result of the economic downturn following the 2007-8 financial crisis, the developments fell behind schedule and were not completed on time, resulting in the purchasers receiving incomplete properties. 

The purchase of each property had been funded by a 15% deposit from the purchaser, and a bank loan secured by a mortgage denominated in Swiss francs – this currency had been chosen because, in the economic environment of the early 2000s, it allowed a low interest rate and therefore appeared to be a cheap mortgage. However, this exposed the purchasers to currency risks on the Swiss franc. Both sterling and the Cypriot pound fell in value against the Swiss franc, resulting in the costs of the mortgages increasing, such that even if the properties had been completed and delivered to the purchasers as planned, the rent receipts would not have been sufficient to enable repayment of the loans. 

APP had two directors, a father and son, the latter of whom was the driving force behind the business (the Managing Director). The Managing Director had been responsible for the marketing plan, which involved the recruitment of a network of salespeople, the production and supply of marketing materials, and a training programme for salespersons in the UK and in Cyprus. The marketing materials had emphasised the mortgage as a key selling point. The Managing Director had no personal contact with prospective purchasers, who had instead dealt with the salespeople.

Several claims were brought in respect of the marketing of the properties, with the claimants alleging APP had made (or was responsible for) numerous misrepresentations and negligent advice. At first instance, one of these types of claims was successful, with the judge finding that APP had owed a duty of care to put the claimants on notice of the currency risks involved in the mortgage, and that it had failed to do so – importantly, this was a negligent failure, not deliberate deceit. The first instance judge had found that the Managing Director had no personal liability in respect of APP's breach of duty.
There were various appeals and cross-appeals, with the claimants arguing that the Managing Director ought to have been jointly liable with APP for the failure to advise of the currency risks. While at first instance it was argued that the Managing Director had assumed personal responsibility to the claimants, the first instance judge found against them, noting that there was no 'singular feature' which would justify a belief that the Managing Director had assumed personal responsibility, that the contracts had clearly been entered into between each claimant and APP and that, at the time of signing those contracts, it would not have occurred to them that they were contracting instead with the Managing Director. This line of argument was not pursued on appeal.

A second line of argument that had also been rejected at first instance, but that was pursued on appeal, was that the Managing Director had accessory liability with APP. To establish such liability, the claimants would have needed to prove:

  •  that the Managing Director had assisted APP in the commission of the wrong against the claimants;
  • that the assistance had been pursuant to a 'common design' between APP and the Managing Director that the wrongful act be committed; and
  • that the wrongful act itself be a tort, i.e., that it would give rise to liability to the claimants.

The third of these had been established by the finding that APP had breached its duty to the claimants to warn them of the currency risks, and the Court of Appeal separately upheld this finding. Argument as to the Managing Director's accessory liability therefore focused on the first and second requirements.

The claimants argued that the Managing Director had assisted APP in the commission of the wrongful act, his involvement being substantial and non-trivial. The basis for this argument was the Managing Director's substantial involvement in all aspects of the marketing plan. The claimants further argued that there was a common design between APP and the Managing Director to sell as many properties as possible.

The Managing Director argued that he had not taken deliberate or active steps to conceal the currency risks from prospective purchasers, and that it would be wrong to characterise his conduct as assisting in the commission of a wrong – the wrong in question being a negligent omission.

The Court of Appeal found against the claimants, holding that the Managing Director had no accessory liability. The Court of Appeal's decision focused in large part on the lack of a common design, stating that there was no conscious decision not to warn the claimants of the currency risk and that therefore, it was difficult to say there was a common design not to do so. While it might be said there was a common design to market the properties in the way they were in fact marketed, and that such marketing constituted a negligent omission, it would be an unduly wide view of the personal liability of directors if they could incur accessory liability in such circumstances.

Analysis

Barclay-Wyatt highlights the need to balance the fundamental principle of a company's separate legal personality with the ability for claimants to have recourse for wrongs done to them where a company's officers have contributed to the fault.  The decision in Barclay-Wyatt re-affirms the general principle of separate legal personality by declining to take an expansive interpretation of accessory liability.  However, the decisions cited and referred to by the Court, as well as its own judgment, stress the difficulty of eliciting strict legal principles which govern a director's personal liability for a company's tortious acts, with many cases being decided on their specific facts.

]]>
{E37CFAB4-9583-4B05-9350-FACA6037F1F7}https://www.rpc.co.uk/perspectives/rpc-big-deal/meaning-of-contractual-duty-of-good-faith/Meaning of contractual duty of good faithWed, 26 Oct 2022 10:07:00 +0100RPC big dealNeil Brown, Clare RooneyThe Court of Appeal has taken a restrictive interpretation of an express duty of good faith in a decision handed down on 21 October 2022 - Re Compound Photonics Group Ltd; Faulkner v. Vollin Holdings Ltd [2022] EWCA Civ 1371.  This decision is important as (i) the Court of Appeal judgment provides a lengthy examination of the meaning of a contractual duty of good faith, and (ii) the decision casts doubt on some previous case law on this point (including overturing the High Court's decision).   

Background

The case concerned the removal from office of two directors who had been appointed by the minority shareholders.  The company's articles of association sought to entrench the position of those directors by providing that the board could not vote to remove them – however, importantly, the shareholders' agreement did not contain an obligation for the majority shareholders to not vote to remove the directors.  Subsequently, one of the directors was "forced" to resign after coming under pressure from the majority shareholders to do so, and the second director was removed from office by the majority shareholders passing an ordinary resolution under s.168 Companies Act 2006.

The High Court held that the minority shareholders had been unfairly prejudiced by the forced removal of their two appointed directors.  At the heart of the Judge's decision was a finding that the majority shareholders had breached an express duty of good faith in the shareholders' agreement by not respecting the "agreement" to entrench the position of the two directors.  

Court of Appeal decision 

The Court of Appeal unanimously agreed to overturn the High Court decision.  Giving the only judgment, Snowden LJ provided a lengthy examination of the existing case law on the meaning of the obligation of good faith.  One of the cases discussed was the relatively recent High Court decision in Unwin v. Bond [2020] EWHC 1768 (Comm) which had provided a pithy bullet point summary of the meaning of good faith, being:

  • to act honestly 
  • to be "faithful to the parties agreed common purpose" 
  • to not use powers for an ulterior motive
  • to deal fairly and openly
  • to have regard to the other party's interests 

To the disappointment of blog writers everywhere (all of whom appreciate a pithy bullet point summary), Snowden LJ cast doubt on whether such a "formulaic" approach is appropriate.  

Whilst Snowden LJ is essentially saying that the meaning of good faith needs to be determined on the facts of every case, the following points can be taken from his judgment:

i) the duty of good faith definitely does include a duty to act honestly;

ii) the duty of good faith goes beyond just a duty to act honestly, and also includes a duty not to act in bad faith – meaning a prohibition on "conduct that reasonable and commercial people would regard as commercially unacceptable, but not necessarily dishonest".  Whilst this aspect of good faith might seem somewhat vague, Snowden LJ said that it would not be "appropriate to try to be prescriptive in describing what conduct might fall into this category";

iii) the court took a narrow view of good faith requiring the parties to be "faithful to the parties agreed or common purpose" (the second of the Unwin v. Bond bullet points).  The court decided that such a requirement would not apply to a shareholders' agreement in the absence of express wording to the contrary.  The court also held that even if it did, the current shareholders' agreement did not create a valid "agreement" to entrench the two directors in the absence of an obligation on the shareholders to not vote to remove the directors;

iv) the court took a narrow view of good faith requiring the parties to deal fairly and openly (the fourth of the Unwin v. Bond bullet points, and often taken to mean procedural fairness).  Applied specifically to the facts of the current case, the court decided that the majority shareholders were not under any procedural duty with respect to director removal beyond that set out in s.168 and 169 of the Companies Act 2006; and

v) the court rejected that a duty of good faith required the majority shareholders to "have regard to the interests of the [minority shareholders] in some undefined way over and above any requirements that would be imposed on shareholders to have regard to the interests of the Company".  This casts doubt on the ongoing relevance of the fifth of the Unwin v. Bond bullet points.  

Consistent with his desire to avoid a "formulaic" approach, Snowden LJ was not setting out to provide a one size fits all definition of good faith going forward.  However, he has provided a precedent for a narrower interpretation of the principles that were previously thought to apply and has, perhaps, provided a narrower definition to begin with.

Practical points

There are two obvious practical points that arise from Re Compound Photonics:

i) there remains a relatively high degree of ambiguity as to what "good faith" means in any given context (as is evident from the requirement for a 79 page Court of Appeal judgement to explain what it means when applied to the facts of this case).  Therefore, by agreeing to include a good faith obligation in a contract, parties are introducing a greater degree of uncertainty as to future interpretation of that contract.  That uncertainty is always likely to favour the "weaker" party (i.e. the one having rights enforced against it), and act as a potential restraint on the "stronger" party.

ii) in order to entrench the position of directors appointed by one set of shareholders, it is necessary for the other shareholders to agree in the shareholders' agreement (or otherwise) not to vote to remove those directors.  Any other form of purported entrenchment is likely to be susceptible to defeat by a s.168 ordinary resolution.  

]]>
{E751AD20-5AB2-4F08-8DCA-C19A9AF26941}https://www.rpc.co.uk/perspectives/rpc-big-deal/model-articles-deemed-suitable-for-sole-director-companies/Model Articles deemed suitable for sole director companiesThu, 06 Oct 2022 09:55:00 +0100RPC big dealRupert WylesA recent decision of the High Court in Re Active Wear Limited [2022] EWHC 2340 (Ch) has suggested that the model articles for private companies are suitable for companies with a sole director appointed, in contrast to another recent decision of the High Court in Hashmi v Lorimer-Wing which we blogged about recently.

Background

The case involved whether a private company had the ability to appoint administrators when it had only one director appointed.
The company's articles of association were the model articles for private companies (the Model Articles), adopted without amendment.

Article 7 of the Model Articles states:

(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.

(2) If—

(a) the company only has one director, and

(b) no provision of the articles requires it to have more than one director,

the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Article 11(2) of the Model Articles states:

(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

Judgment

The Deputy Judge hearing the case held that the sole director of this company was able to make decisions on her own and, accordingly, the appointment of administrators was valid.

The Deputy Judge held that Article 11(2) of the Model Articles is specifically disapplied by Article 7(2) in circumstances where there is only one director and there is no other provision requiring more than one director, and held that there is no other provision in the Model Articles requiring more than one director.  The Deputy Judge's rationale for Article 11(2) being specifically disapplied by Article 7(2) is that both articles are in contained in the same section of the Model Articles, headed "Decision-making by directors".

The Deputy Judge distinguished this case from the decision in Hashmi v Lorimer-Wing (also known as Re Fore Fitness) on the basis that in Hashmi v Lorimer-Wing the Model Articles had been amended to include a bespoke article 16 which stated that the quorum for meetings of the board was two directors.  The Deputy Judge in Re Active Wear concluded that the decision in Hashmi v Lorimer-Wing was specific to its facts and that Model Article 7(2) only failed to operate as a result of this bespoke article 16.  By contrast, as in Re Active Wear, where the Model Articles have not been amended, then decisions of a sole director will be valid.

Analysis

The main conclusion from the present case is that Model Articles are suitable for adoption (without amendment) by private companies with a sole director – in contrast to the opposite conclusion which was reached from the Re Fore Fitness judgment.

Both the present case and Hashmi v Lorimer-Wing are High Court judgments (meaning that the present case cannot overrule the Hashmi v Lorimer-Wing judgment).  However, the Deputy Judge in the present case has distinguished Hashmi v Lorimer-Wing if not quite into obscurity, certainly into a narrow field of application.  Therefore, it can be concluded that Model Articles are suitable for adoption (without amendment) by private companies with a sole director. Equally, it should be possible to make amendments to the Model Articles for a sole director company provided those amendments do not contradict Model Article 7(2).  It is also the case that historic decisions taken by a sole director of a private company with the Model Articles adopted without amendment should be valid, and therefore should not require a shareholder resolution to ratify.

]]>
{D829C37B-2F1B-4E07-AB6B-B3BB4C649CA9}https://www.rpc.co.uk/perspectives/rpc-big-deal/mini-budget-2022-main-tax-announcements/Mini Budget 2022 - Main tax announcementsThu, 29 Sep 2022 09:50:00 +0100RPC big dealBen RobertsThe new Chancellor, Kwasi Kwarteng, delivered his first Autumn Statement last Friday. Described officially as the Growth Plan 2022 and unofficially as a 'mini' or 'emergency' Budget, there is nothing small about the degree of debate generated by the announcement.

The focus of the announcement was investment and incentivisation. The new administration had unashamedly trailed the package as being designed to turbo-charge the UK economy. The government's stated intention is to hit an economic growth target of 2.5% per annum.. 

The main business and personal tax announcements made by the new Chancellor last week are summarised below. After a run of (arguably) anti-climactic budget announcements this most recent event certainly included some eye-catching measures.

Tax cuts

  • It came as no surprise that the main rate of corporation tax, which was due to increase to 25% from April 20231, will instead remain at 19%.
  • The planned changes to the rates of the banking company surcharge, and the diverted profits tax, are also being cancelled (as such planned changes were consequential to the planned increased corporation tax rate)
  • Also as expected, the recent rise in national insurance contributions (NIC) rates (both employee and employer, by 1.25%) will be reversed from 6 November 2022. As a result the planned new "health and safety" levy due to take effect from April 2023, to replace the 1.25% NIC increase, has been shelved
  • One of the most striking, and widely unexpected, measures was the announcement of the abolition of the 45% top rate of income tax, from April 2023
  • The new, reduced, basic rate of income tax (at 19%) will take effect earlier than planned (April 2023)
  • The planned increase from April 2023 (by 1.25%) in the dividend tax rate has been reversed

Off-payroll working rules

In a move that took many (if not all) by surprise, the Chancellor announced the reversal of significant recent changes to the off-payroll working tax rules. The off-payroll working rules, like the so-called 'IR35' tax rules from which they emerged, were designed to counter tax avoidance whereby individual consultants are engaged via intermediaries (such as a personal services company or PSC). 

These to-be abolished rules, which took affect in 2017 for the public sector and in 2021 for private sector companies (save for the smallest businesses) placed the burden of determining a worker's tax status, when engaging via a PSC or other intermediary, on the so-called end client. The end-client also has to account for any tax and NICs due as a result of a finding of 'deemed' employment.

The rules will be reversed from April 2023.

This is likely to be a welcome change for many, as it takes us back to the 'old' IR35 rules. Engagers of workers via PSCs will face a reduced compliance burden and the onus of deciding whether there is a deemed employment (and any resulting liability for tax and NICs) will revert to the PSC.

Stamp duty land tax (SDLT) on residential property (England and Northern Ireland only)

With immediate effect (from 23 September 2022):

  • The threshold at which SDLT becomes payable has increased from £125,000 to £250,000 (for existing home-owners)
  • The SDLT nil-rate threshold for first-time buyers:
    • has increased from £300,000 to £425,000; an
    • is available for residential properties costing less than £625,000 (previously £500,000)

Investment Zones

It was announced that the government intends to establish 'investment zones' carrying tax benefits over 10 years that will include:

  •  an SDLT exemption for land bought for commercial or for new residential purposes
  • no employer NICs on earnings (up to £50,270 p.a.) for each new employee working at least 60% of their time in the zone
  • 100% first year capital allowances for qualifying plant and machinery expenditure
  • 100% relief from business rates on newly-occupied business premises

No timescale for introducing these investment zones has been provided, at the time of writing.

Tax simplification

In another measure not widely anticipated, the Office for Tax Simplification is to be abolished, after 12 years of mixed results. The stated intention is for tax simplification to be "embedded" into the institutions of government. 

Other measures

  • The 'temporary' annual investment allowance (AIA) of £1m for qualifying plant and machinery expenditure has been made permanent (it was due to revert to £200,000 in April 2023). The AIA provides for 100% tax relief by way of capital allowances.

  • From April 2023, in a bid to improve the attraction of a specific form of tax-advantaged employee share option plan (CSOPs) the maximum value of options that can be granted will be increased from £30,000 to £60,000. CSOPs are often of interest to companies that are looking to incentivise employees through grant of options but which do not qualify for enterprise management incentive (EMI) purposes. This change is helpful in that regard.

  • From April 2023, the seed enterprise investment scheme (SEIS) investment limit will be increased to £250,000 and the SEIS gross asset limit will be increased to £350,000.

  • On VAT-free shopping, the government "will introduce a modern, digital, VAT-free shopping scheme, with the aim of providing a boost to the high street and creating jobs in the retail and tourism sectors." A consultation will follow.

1For companies with annual profits in excess of £50,000.

]]>
{83B7AA70-FB93-4DAE-98B2-079F6098AD17}https://www.rpc.co.uk/perspectives/rpc-big-deal/liability-principal-agent-breach-warranty-misrepresentation-in-share-purchase-agreement/Liability of principal for agent's breach of warranty and misrepresentation in a share purchase agreementTue, 20 Sep 2022 14:28:00 +0100RPC big dealThis case highlights the necessity for a purchaser to test the veracity of a seller's pre-contractual statements through a thorough due diligence process and to ensure that all parties relevant to the target business are party to the SPA.

Background 

The claim related to the sale by Martin and Bell of their online gambling business, known as ‘21Bet’, to Ivy Technology in 2019. The 21 Bet business was run by Martin but financed by Bell. The beneficial interest in the shares of 21 Bet was owned by Martin and Bell equally. During the course of negotiations of the share purchase agreement (SPA), Ivy was informed that Bell wanted to remain ‘in the shadows’. Negotiations were held between Martin and Ivy. Bell was not included as a party to the SPA.

In the SPA, Martin gave various warranties relating to the liabilities and financial position of 21 Bet. Following completion of the acquisition, Ivy discovered the 21 Bet business had significant outstanding liabilities, including amounts due to gaming authorities, HMRC and 21 Bet's landlord. Ivy also discovered a number of the business' expected income streams were either non-existent, or had ceased to exist. 

Ivy brought proceedings against Martin on the basis it purchased the business relying on fraudulent misrepresentations made by Martin about the business’ profitability during pre-contractual negotiations.  Even though the negotiations had been conducted almost exclusively by Martin, Ivy argued that the fraudulent representations had been made by Martin acting as Bell’s agent, as well as on his own behalf. 

Additionally, Ivy claimed breach of the SPA warranties and sought to establish primary liability on the part of both defendants for this claim on the basis that Martin entered into the SPA both as principal in respect of his own beneficial interest, and also as agent for Bell in respect of his beneficial interest in the shares. 

Relying on the fact that he had not been involved in the negotiations and was not named as a contracting party, Bell argued that any representations made by Martin had not been made on his behalf. Bell also argued that as he was not a party to the SPA, he was not liable for the breach of warranties claimed by Ivy. 

Commercial Court judgment

The Commercial Court upheld Ivy's claim for fraudulent misrepresentation. Martin had negotiated the deal on behalf of Bell even though Mr Bell was not a party to the SPA. The commercial substance of the transaction was "manifestly approved and adopted" by Bell. Bell may not have had any liability under the contract itself, but he was still liable for the misrepresentations made by Martin during the course of the pre-contractual negotiations.

As a principle of English law, where a principal authorises its agent to make a contract on its behalf, the contract is treated as made between the principal and the counterparty. The principal can sue and be sued on the contract - not as a third party, but as an unnamed principal party to the contract. Martin had sufficient authority to conduct negotiations on Bell's behalf and as such he was (as principal) liable for Martin's fraud. 

On the breach of warranty claim, the Commercial Court found that Ivy had failed to establish any recoverable damages for the breach.

]]>
{5E6180F1-85E3-46B9-93EE-BB0984C3EF2C}https://www.rpc.co.uk/perspectives/rpc-big-deal/whats-the-damage/What's the damage?Wed, 07 Sep 2022 10:00:00 +0100RPC big dealChris BrierleyBackground

In the recent case of MDW Holdings Limited v Norvill, the Court of Appeal considered the damages that would be awarded to a buyer where the warranties provided by the sellers were not correct.

MDW Holdings Limited (MDW) had acquired the entire issued share capital of G.D. Environmental Services Limited (the Company) from the Norvill family, two parents and their son, for approximately £3.6 million. The Company's business involved the collection, processing and disposal of waste.

The share purchase agreement included various warranties, including that the business had been conducted in accordance with applicable laws, that the Company had all required consents and was not in breach of the terms of those consents, and that there were no circumstances likely to lead to proceedings against the Company.

It is fair to say that these warranties were not true – indeed, the judge at first instance found that there were repeated and persistent breaches of one of the Company's environmental permits; and that there had been "a culture of lying to the regulators when it was convenient to do so", notwithstanding that it was a criminal offence to mislead the Company's two regulators.

What's the damage?

As there had been a clear breach of certain of the warranties, it was left to the court to decide how damages should be calculated. It was not in dispute between the parties that damages should be calculated by looking at the difference between the value of the Company on the basis that the warranties were true (Warranty True) and the value of the Company on the basis that the warranties were false (Warranty False).

Here, the value was to be determined by reference to a typical valuation mechanism – applying a multiple to the Company's EBITDA.

While one might expect that the value of the Company – assuming the warranties were true – is the purchase price that has been agreed between the sellers and the buyer, the judge at first instance decided that the Warranty True value was, in fact, less than the purchase price. This decision was reached after hearing expert evidence – from an expert appointed by MWD and from an expert appointed by the Norvills – that the multiple applied to the Company's EBITDA to calculate the purchase price was "on the high side".

The judge then considered the Warranty False value, looking at the impact on EBITDA of the warranties being untrue – in particular, the additional costs that would have been incurred had the Company been operated lawfully. This has the obvious consequence of reducing the Company's EBITDA for the purposes of calculating the Warranty False value.

In addition, the judge also decided that the multiple applied to EBITDA should be reduced to reflect reputational damage that the breaches could cause the Company and the potential damage to the business of the Company – for example, that the Company could have been prosecuted or lost the licences required to operate the business.

The Norvills appealed to the Court of Appeal on the basis that there should have been no reduction in the multiple applied to EBITDA, because the potential damage to the business of the Company did not actually materialise – in other words, the Company was not prosecuted and did not lose its licences. While it was accepted that damages were to be calculated as at the date of the share purchase agreement, the Norvills argued that the judge should have had regard to how matters turned out.

The Court of Appeal dismissed the Norvills' appeal. It was held that events that occur after a purchase cannot affect the value at the time of the transaction which is, as mentioned above, the relevant date for assessing damages. The judge at first instance was justified in reducing the EBITDA – taking into account the extra costs that the Company would have incurred had it lawfully disposed of waste – and in reducing the multiple applied to EBITDA – on the basis that purchasers knowing the misconduct occurring within the Company would be prepared to pay less for the Company.

Conclusion

While parties to a share purchase agreement spend much time negotiating the warranties and associated limitations of liability, the case highlights the uncertainty as to what damages would be paid if one or more of the warranties turn out not to be true. 

The value of a company on the basis that the warranties are true may not be the same as the purchase price – this will be a matter for a judge to determine, based on expert evidence presented to the court. Further, while it is clear that a court will take into account the impact on EBITDA of a breach of warranty, it is also open to the court to adjust the multiple applied, particularly where the breach of warranty has the potential to cause reputational damage or affect the company's goodwill.

The simplest way to avoid a warranty claim is, of course, to ensure that a thorough disclosure exercise is carried out so that warranties are qualified by matters clearly set out in the disclosure letter. In this case – given that (as the High Court found) the Company had been misleading its regulators – it is perhaps not surprising that the warranties were not true and that appropriate disclosures had not been made.

]]>
{EFED84F4-C95A-437B-BA27-64B5FFCD136A}https://www.rpc.co.uk/perspectives/rpc-big-deal/transactional-liability-insurance-outlook/Transactional liability insurance outlookThu, 01 Sep 2022 18:22:32 +0100RPC big dealEmily McGregor, Jeremy CunninghamDespite disruptions caused by the Ukraine conflict, M&A activity remained relatively strong in the first half of 2022 – helped by the dollar's strong performance against other currencies, which encouraged a flow of investment in Europe by cash-rich US corporates.  The demand for transactional liability insurance products remains high (both in general corporate and in private equity deals, and across a broad range of sectors).  

New underwriters and managing general agents continue to enter the transactional liability market, driving competition and innovation.  In this article, we highlight certain trends in the market and forecasts for 2022 and beyond. 

Coverage focus areas

Cyber and ransomware attacks have risen significantly over the last few years, causing particular concern for businesses which rely on their IT systems more than ever before, and the insurance market generally, which is still working to redress issues caused by historically low cyber insurance pricing.  In this context, W&I insurers are expected to have particular focus on IT and cyber in their underwriting processes. The due diligence undertaken by transaction parties in these areas is becoming more specialist and technical – not only in respect of target companies in the technology sector, but also in other sectors including financial services and healthcare. 

Where cyber is not generally excluded under a W&I policy, coverage may only be available on an “excess of and no broader than” basis (i.e. on the same terms as the target’s existing underlying insurance with recovery only possible once such policies are exhausted).

In the current geopolitical climate, insurers are also taking a particularly firm approach to exclusions relating to sanctions risks.

Environmental, social and governance (ESG) considerations have become increasingly high-profile in recent years and can often be a value driver in M&A deals, with various companies mandated to make more sustainable investments and increase transparency around "green" issues.  Greater legislative and public scrutiny of ESG issues is anticipated in the coming years, which is likely to lead to buyers seeking ESG-specific deal protection (for example, warranties that the target has adequate ESG policies, that there have been no ESG claims, and that the target complies with the Task Force on Climate-Related Financial Disclosures-based reporting).  Comprehensive diligence by an ESG compliance expert to assess and mitigate the risk may become more common and will be a helpful tool for insurers when determining whether and to what extent to cover ESG specific risks. 

W&I insurance in SME deals

SME deals in the UK with an enterprise value of £250,000 - £10 million represent a huge potential growth area in the W&I insurance market, with the market estimated to be worth $8 billion in gross written premium.  Historically, such deals have been uneconomical to insure, however certain insurers have developed innovative tech / AI driven underwriting techniques which have opened-up this market by enabling a quicker, simpler and cheaper underwriting process. We expect such products to continue to develop and grow. 

Synthetic products

Synthetic products continue to increase in popularity.  A traditional W&I policy covers warranties that have been negotiated between the buyer and seller in a purchase agreement.  A synthetic policy however, simply attaches a standalone "synthetic" set of standard warranties that the insurer is prepared to stand behind – removing the need for negotiations between the buyer and seller.

Traditionally, synthetic products have been used most frequently in respect of tax.  While we expect this to continue, we also anticipate an increase in the use of synthetic products in SME deals (see above) and distressed M&A.

Synthetic products are a useful tool to unlock distressed transactions by enabling buyers to obtain a level of comfort on such deals that would not ordinarily be available from a distressed seller or a trustee in bankruptcy.

For more detail on synthetic warranties, please see our blog: W&I Insurance: The rise of synthetic warranties?

Standalone products

Standalone cover has become more commonplace for specific tax and contingent (known) risks that would typically be excluded by a traditional W&I policy.  In respect of tax, particular areas of note for standalone cover include cross-border investment structures (including permanent establishment and residency-based risks where companies could be subject to tax liabilities in jurisdictions other than the jurisdiction of their incorporation), forward-looking cover for future dividend and interest payments and tax risks already under audit.

We have also seen an increase of interest in specific title insurance policies, which can address key red-flag issues identified in diligence, for example title concerns resulting from a defective share buyback.

Claims

In the W&I Insurance chapter of our Annual Insurance Review 2022, we noted that claims trends in 2021 remained largely unchanged from previous years; in particular, notification frequency (at a rate of approximately 1 in 5 policies) and breach type (tax; financial statements and accounting; material contracts).

It is too early to confirm whether this remains the case in 2022, but it seems likely that the record-breaking number of policies underwritten last year will ultimately translate into a higher absolute number of claims notifications over the next few years.  Further, a more aggressive approach by tax authorities in light of budget deficits may well lead to an increase in tax claims.  

]]>
{F3CD81AF-500D-435F-90E5-C02DEB0C34FA}https://www.rpc.co.uk/perspectives/rpc-big-deal/japan-and-esg-focused-ma/Japan and ESG-focused M&ATue, 12 Jul 2022 15:19:00 +0100RPC big dealNigel CollinsJapan has a long history with the idea of businesses looking beyond profits. Shuchu kiyaku (code of ethics) is contained in a Japanese document from the early 17th Century and influenced by the ideals of Confucianism, it encouraged corporations to think beyond profits. Commercial activity should not be carried out for the sole benefit of a business but also for the benefit of society.i

As noted in an interesting article on the topic by McKinseyii,  Japan’s corporate culture has been underpinned by a robust network of multistakeholder relationships for centuries. Today, many Japanese companies make commitments to their surrounding communities and wider society, promising “lifelong employment, environmentally conscious production processes, customer-oriented products and services, and product safety.” 

McKinsey, however, went on to note that Japanese companies’ overall performance on ESG lags behind that of companies in North America and Europe. Large players outperform smaller players as they generally have greater global exposure, making them naturally more attuned to changes in international norms and more inclined to adapt their brand messaging and business activities accordingly. Consumer-goods companies in Japan tend to do better than companies in the extractive industries, manufacturing, or technology. 

Like others, many Japanese corporates are on a journey to improve their ESG performance, and over time we will see ESG come to the fore as item of influence when assessing an M&A target. According to a recent survey by Bainiii some dealmakers in North America and Europe are now including a focus on ESG in their M&A processes:

  • 11% of M&A Executives surveyed say they extensively assess ESG in the deal-making process on a regular basis today, but 65% expect their company’s focus on ESG to increase.
  • Some companies are ahead of this curve. By incorporating ESG into their M&A process, they have set themselves up with an advantage in pursuing value creation opportunities and gained a head start in meeting their ESG imperatives.
  • By making sustainability a part of each deal thesis and using corporate priorities as a benchmark to assess each potential deal, the best companies find assets that will advance existing ESG initiatives and create economic value.

Japanese corporates have a long association with the principles behind ESG and going forward will need to link their overarching corporate ESG strategy to their M&A strategy, and they will need to find assets that will not only create economic value, but further existing ESG initiatives as well.

i - Calvin M. Boardman and Hideaki Kiyoshi Kato, “The Confucian roots of business kyosei,” Journal of Business Ethics, December 2003, Volume 48
ii - https://www.mckinsey.com/business-functions/sustainability/our-insights/charting-a-path-from-the-shuchu-kiyaku-to-esg-for-japanese-companies
iii - https://www.bain.com/insights/esg-imperative-m-and-a-report-2022/

]]>
{3CC84370-6ECE-413B-8602-2EABDEE14765}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-fca-becoming-a-data-driven-regulator/The FCA: becoming a data-driven regulatorFri, 01 Jul 2022 14:50:00 +0100RPC big dealNeil Brown, Lauren MurphyThe FCA published its second data strategy in 2020 (the first being published in 2013) and since then it has been full steam ahead. 

The FCA set out that it wanted to be smarter in the way it uses its data and advanced analytics to transform the way it regulates and reduce the burden on firms.

This focus on data and innovation is a fey feature of its Business Plan 2022/23, accompanied by its Three-year Strategy 2022 to 2025 and an Outcome and Metrics document published in April 2022. Some of the FCA’s key intentions in relation to data include:

  • using data more systematically to ask the firms it supervises more rigorous questions and using its enforcement and intervention powers more actively, pushing the boundaries where it needs; 
  • reducing and preventing serious harm by harnessing data to assess problems more quickly and so act sooner, aiming to prevent harm from happening in the first place;
  • improving its reporting requirements, for example, through automated data collection;
  •  improving its ability to detect market abuse, through a significant upgrade in its market surveillance systems;
  •  supporting integrity in the environmental, social and governance (ESG) ecosystem, by encouraging improvements in ESG data, ratings, assurance and verification services; 
  • examining the role of artificial intelligence in financial services, working closely with the Digital Regulation Cooperation Forum  and Bank of England, in particular in relation to unlocking the benefits of competition; 
  • continuing to invest in technology, including developing a Digital Unified Intelligence Environment to connect the vast array of data and intelligence it holds across its systems.

The FCA further stressed its focus on their data driven future in a speech delivered by Chief Executive, Nikhil Rathi, where he noted that ‘as the complexity and breadth of data broadens, so too will our remit’. He commented on the progress made by the FCA to date including reaching an agreement with Google in the UK that it would ban ads for financial products that have not been approved by an authorised person. TikTok and Microsoft have also implemented similar policies.

The FCA has now published its data strategy update 2022, which further detailed the progress made in relation to the 2020 data strategy including:

  • collecting more liquidity data meaning the FCA can monitor the risk of firm failure and act early to improve consumer protection;
  • analytics have developed and implemented sanctions screening tools to support the monitoring of the effectiveness of a firm’s controls in identifying organisations or individuals that have been sanctioned; 
  • using web scraping to identify potential scams. The FCA is scanning an average of 100,000 websites created every day to identify newly registered domains that show the characteristics that could be used for scams or fraud; 
  • building a range of innovative programmes, including;
    • the Regulatory Sandbox which allows businesses to test innovative propositions in the live market with real consumers, alongside regulatory oversight;
    • Innovation Pathways the new, unified firm service that provides tailored regulatory guidance to innovative businesses, including established firms, start-ups and tech firms.

Going forward, this is a space to watch as the FCA has stated that it will publish further updates to explain its progress and how the outcomes it delivers continue to support the transformation vision set out in 2021, and the priorities set out in its Business Plan 2022/23.

]]>
{25B31C69-6B7A-4004-89FC-B6355F49DE9E}https://www.rpc.co.uk/perspectives/rpc-big-deal/technology-in-insurance/Technology in InsuranceWed, 22 Jun 2022 10:22:00 +0100RPC big dealWilliam HogarthWhilst panellists commented that the insurance industry had not had an 'Uberization' moment – when new market disruptors succeed in radically ripping up the pre-existing order with new tech-driven solutions – technology has and will continue to radically transform the insurance industry. This impact though has been more subtle than many had predicted. Although there has not necessarily been the predicted tech and data driven 'big bang' transformation of the insurance industry, there are many technology advancements and trends that are transforming insurance products and services as well as the operations of companies within the industry. 

Individually these tech buzz-words - such as blockchain, AI, smart contracts, telematics, machine learning, robotic process automation and internet-of-things – flash brightly in the insurance industry's collective consciousness, taking up innumerable virtual pages of on-line commentary.  Some of these may dim and even fade away, others will continue to shine, and more buzz-words will join them.  It is the combination of all of these multiple technology advancements and trends that together will have the transformative long-term effect on the industry. 

Where are we seeing tech-driven changes across the industry?

Customer facing

Technology has been a key driver for providing new insurance products and innovative services for insured customers. Both existing industry players and new insurtech start-ups have been investing in this space, developing new products, new ways of reaching customers and new digital services throughout a product's lifecycle, all enabled by new technologies. 

  • New products are being developed that are created or adapted to take advantage of new technology. Within auto, telematics have for some time enabled usage based insurance, pay-as-you drive and pay-how-you drive products, for example. Parametric insurance – with clear and binary payout-triggers - is particularly well suited to many tech-driven new insurance products, taking advantage of advances like satellite imagery to trigger fast claims payments, or connected sensors like those used by FloodFlash to measure water-depth at insureds' premises. 

  • There is also a significant shift in new insurance products to meet the evolving needs of customers in a digital world. Intangible assets rather than traditional 'bricks and mortar' assets make up more and more of companies' value and revenue generation, and these assets are susceptible to different threats and risks. With ever-increasing automation of activities previously carried out by humans, whether it is in manufacturing, warehousing, driving or services, software rather than human error becomes an ever-important driver for insured losses. Insurance is adapting to face these issues with demand for new innovative cyber-based products and greater understanding of software liability across different industries but the speed of change across the global economy is challenging insurers and leading to protection gaps for insureds.

  • Insurance sales within the retail market have long been moving to the digital world and further drives to improve the effectiveness of marketing as well as technology aimed at improving customer digital experience and sales processes are continuing this trend. Machine learning, AI, use of mobile apps and robotic process automation are key parts of this and insurers and intermediaries are continuing to invest in these areas. 

  • Technology is also driving a shift towards additional customer services connected with insurance products. Insurers and intermediaries are playing a more active role in claims prevention and mitigation, providing tech-enabled advice, disaster/risk warning and other risk mitigation techniques that are designed to add value to their products and benefit both insured and insurer. 

Internal processes and innovation

Although the customer-facing side of tech-innovation within insurance is often the most heavily publicised, new uses of technology within the operations of insurers and intermediaries is no less important. They represent both great opportunities – in terms of reduced costs, better underwriting performance, and market-differentiation – but also significant risks – such as enhanced regulatory, data and reputational risks. However, it is clear that the industry is embracing technology and, although to a large extent many of the changes are incremental, they constitute a significant shift and companies who fail to keep up risk falling behind their competitors. 

Data processing and analytics as well as robotic process automation are key areas where insurers are embracing new technology in their operations, but technology is also providing solutions and opportunities in other areas.

  • Better recording, accessibility and use of data by insurers remains a key focus area for technology. Insurers have access to such vast data resources but realising the value within these remain difficult, particularly for insurers with legacy systems. Incorporating this internal and external data into (more) accessible pools is the starting point and firms are investing in solutions to help them achieve this. However, as the data pools expand security, data processing compliance and the ability to monitor and audit the data pools becomes increasingly challenging.

  • Availability of data is just the start and in order to understand, interpret and utilise their data insurers and intermediaries are increasingly looking to AI and other tech-driven solutions. The use of technology in data processing and analytics by insurers is particularly prevalent in modelling and underwriting where insurers are looking to improve their understanding of risks, assist underwriting and provide more bespoke pricing. This does not mean that technology is completely replacing human underwriting – in particular outside the retail market – but it is augmenting the process and providing alternative data driven information, inputs and checks into underwriting decisions. 

  • Tech-driven automation has been and will continue to be important within the industry as participants look to reduce costs and improve customer experience. In particular when combined with AI and improved data analytics, tech-driven solutions such as customer bots can increasingly reduce the amount of time needed from staff across the product lifecycle, from underwriting, through administration and claims, to renewal. 

  • Insurers and intermediaries are also embracing technology across other areas of their businesses. Fraud detection is a good example where insurers can use technology to protect against losses to their bottom line. Other solutions, such as digital twins and the use of the internet of things to monitor insureds' properties and equipment, can help insurers and intermediaries gain a more accurate understanding of an insured's insurance needs and the underwriting risks associated with them. 

What it means for the insurance industry 

It is perhaps the myriad of different tech applications within the insurance industry that has made it more resilient to disruption from any individual technology driven competitor. The recent stock market tumbles of Lemonade, for a time the darling of tech-driven insurance disruptors, along with Hippo and Root are proving that innovative technology does not automatically lead to (immediate) market success, with investors now seemingly keen to focus on underwriting results and less willing to sustain losses for market share in the way they have become accustomed to with other industry disruptors.

However, as we heard from many of the speakers at our 'Technology in Insurance' event, data and technology are the driving forces behind many of the new breed of insurance companies and are key areas for all existing market participants. Almost despite the hype, there is real value and opportunity in well-structured and applied technology and it is clear insurance companies that are open to new technology from a cultural perspective – and willing to invest in it from a financial perspective – are going to be best placed to take advantage. Given the speed that technology moves, those who are not embracing the change may find themselves quickly falling behind.  

Technology will therefore drive and implement change within the insurance industry. But it will also create new risks. 

Failure to comply with data protection requirements can lead to both reputational damage and significant fines – in the UK and overseas.

In addition to data protection regulations which apply across industries, insurance companies operate in the highly regulated financial services environment. Insurers and intermediaries need to make sure that their technology solutions are compatible with their regulatory requirements – such as around operational resilience, governance and fair treatment of customers. 

The UK regulators are looking carefully at new technologies and what the implications may be for the companies they regulate and their customers. With this in mind, the FCA has already published specific guidance for firms outsourcing to the cloud and other third party IT services and more recently published a report (with the Bank of England) providing guidance to firms and setting out regulatory expectations of best practice when using AI and machine learning. There will be more reports, guidance and regulations as insurance regulators around with world try to keep up with changes in technology and tech-innovators need to be mindful of the highly regulated world within which the insurance industry operates. 

]]>
{9740A200-799B-4B51-A617-19DF24765A32}https://www.rpc.co.uk/perspectives/rpc-big-deal/model-articles-deemed-unsuitable-for-sole-director-companies/Model Articles deemed unsuitable for sole director companiesTue, 24 May 2022 14:28:00 +0100RPC big dealRupert WylesUpdate (October 2022): A subsequent case (Re Active Wear Limited) has cast doubt over the judgement in, and effects of, the case discussed in this blog, and the analysis set out below has been superseded.  Please refer to our subsequent blog in relation to the Re Active Wear Limited judgment here.

Background

The case involved whether a company had the ability to bring a claim when it had only one director appointed. The company had adopted articles of association based on the model articles for private companies (the Model Articles) with some bespoke provisions.

Article 7 of the Model Articles, which was incorporated into the company's articles, states:

(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.

(2) If—
(a) the company only has one director, and
(b) no provision of the articles requires it to have more than one director,

the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Article 11(2) of the Model Articles, which was incorporated into the company's articles (subject to the bespoke Article 16), states:

(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

The company's articles also included a bespoke Article 16, which stated that the quorum for meetings of the board was two directors.
The Deputy Judge hearing the case held that "a provision in the articles requiring there to be at least two directors to constitute a quorum logically is a requirement that the company in question have two directors in order to manage its affairs". On that basis, the requirement of Model Article 7(2)(b) was not met, and therefore Model Article 7(2) did not operate in the circumstances. While the case was specifically concerned about the application of the bespoke Article 16, it applies similarly to Model Article 11(2), on the basis that both articles impose a quorum requirement of two.

Analysis

The two main conclusions from this case are:

  • The Model Articles are not suitable for adoption (without amendment) by private companies with a sole director.
  • Any decisions taken by the sole director of a private company with the Model Articles adopted (without amendments) will prima facie be ultra vires (other than decisions taken in accordance with Model Article 11(3), which operates where the total number of directors of a company is less than the quorum required and allows such directors to hold a board meeting to appoint further directors).

Some of the initial commentary about this judgment has expressed surprise, given that many held the view (as was put forward by counsel in this case) that Model Article 11(2) does not require a minimum number of directors and therefore, where a company has a sole director, Model Article 7(2) becomes operative and supersedes any other provisions of the Model Articles relating to directors’ decision-making, including Model Article 11(2). This view was supported by the Department of Business, Industry and Skills' non-statutory guidance in respect of the Model Articles, which stated that Model Articles do not provide for minimum number of directors. However, this view was rejected by the Deputy Judge hearing the case.

Practical observations

  • Where a private company with a sole director has the Model Articles adopted (without amendments), that company should consider:
    • amending its articles to allow the sole director to make valid decisions; and 
    • given that any amendment of the articles will not have retrospective effect, passing a shareholder resolution to ratify any actions purported to have been taken by such sole director.
  • On the incorporation of a private company, the Model Articles should not be adopted without amendment where such company will only have a single director appointed.
  • Due diligence undertaken as part of a transaction or financing should include reviewing whether any entity which forms part of the subject matter of such transaction or financing has ever been a sole director company with the Model Articles adopted (without amendments), in which case a shareholder resolution to ratify any actions purported to have been taken by such sole director should be considered.
]]>
{CC9E4BEF-21E1-47F4-B0A8-7D6A0C7671CD}https://www.rpc.co.uk/perspectives/rpc-big-deal/climate-related-financial-disclosures-what-companies-and-llps-need-to-know/Climate-related financial disclosures: what companies and LLPs need to know about the UK's new mandatory rulesTue, 10 May 2022 10:28:00 +0100RPC big dealBackground

As part of an increased focus on environmental, social and corporate governance (ESG) matters, the importance of climate-related issues to businesses has been growing consistently and rapidly in recent years. As well as the physical risks associated with climate change, such as frequent or severe weather events, companies are also facing transition risks as the UK moves towards becoming a low carbon economy. These include changes in regulation and government policies, as well as changes to market and consumer sentiment, all of which can have material impacts on the operations and value of companies and their assets.

It is no longer just governments and regulators that are assessing companies' climate-related commitments: as part of their broader assessment of ESG criteria, lenders, investors, insurers, employees and customers are increasingly factoring climate risk and disclosures into their decision making.

New UK climate-related financial disclosure regulations

On 17 January 2022, the UK government published the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (together, the Regulations). The Regulations introduce new requirements for in-scope companies and limited liability partnerships (LLPs) to disclose climate-related financial information broadly in line with the Recommendations of the Financial Stability Board's Taskforce on Climate-related Financial Disclosures (TCFD)1  (the Recommendations). 

In its guidance published in February 20222 , the Department of Business, Energy and Industrial Strategy (BEIS) stated how disclosures of material climate-related financial information is a tool which can be utilised to support smarter investment decisions as the UK, and the rest of the world, moves towards a low carbon economy. The easier it is to compare companies' exposure to climate-related risks and opportunities, the better investors will be able to incorporate these risks into their business decisions, while at the same time making information more accessible to stakeholders and third parties for relevant decisions.

When do the Regulations take effect?


The Regulations came into force on 6 April 2022 and apply to accounting periods starting on or after that date. This means that, where applicable, companies and LLPs will need to include the relevant disclosures in annual reports prepared for the relevant accounting periods.

Which companies do the Regulations apply to?

The Regulations will apply to UK registered companies or LLPs that meet the following criteria: 
  • companies that are currently required to produce a non-financial information statement in their annual report – these are companies that have more than 500 employees and have either shares or other transferable securities admitted to trading on a UK regulated market, such as the Main Market of the London Stock Exchange, or are banking companies or insurance companies (Relevant Public Interest Entities);
  • companies with securities admitted to the AIM Market of the London Stock Exchange with more than 500 employees;
  • companies not included in the categories above which have more than 500 employees and an annual turnover of more than £500 million;
  • LLPs, which are not traded or banking LLPs, and have more than 500 employees and an annual turnover of more than £500 million and;
  • traded3  or banking4  LLPs.

What are the new climate-related financial disclosure requirements?

Companies and LLPs within scope will be required to include specific disclosures in their annual report on climate change where these are material to the value of a company and its assets, or material to an understanding of the business or its strategy. The information required to be disclosed is:

a) a description of the governance arrangements of the company or LLP in relation to assessing and managing climate-related risks and opportunities;
b) a description of how the company or LLP identifies, assesses, and manages climate-related risks and opportunities;
c) a description of how processes for identifying, assessing, and managing climate-related risks are integrated into the overall risk management process in the company or LLP; 
d) a description of— (i) the principal climate-related risks and opportunities arising in connection with the operations of the company or LLP, and (ii) the time periods by reference to which those risks and opportunities are assessed; 
e) a description of the actual and potential impacts of the principal climate-related risks and opportunities on the business model and strategy of the company or LLP; 
f) an analysis of the resilience of the business model and strategy of the company or LLP, taking into consideration of different climate-related scenarios; 
g) a description of the targets used by the company or LLPs to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
h) the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and a description of the calculations on which those key performance indicators are based.

Are there different group and subsidiary level reporting requirements?

Companies are expected to report at the group level (or at the company level if not included within consolidated group reporting). Subsidiaries whose activities are included within a consolidated group report of a UK parent that complies with the climate-related financial disclosures requirements are not required to report separately.

What about overseas operations?

When a UK group is in scope the top UK parent is expected to report, within its Annual Report, on the global operations of the UK group (regardless of whether activities are conducted through a UK subsidiary or an overseas subsidiary).

Are UK companies with an overseas parent exempt?

A UK company is exempt from the disclosure requirements at company level where that company's activities are included in a consolidated report and there is a UK parent company. Where a UK company has an overseas parent that reports on a consolidated basis, that exemption does not apply, and that UK company must include the necessary disclosures in its Annual Report. 

Where do the disclosures need to be made?

Companies should include these disclosure requirements in their non-financial and sustainability information section that forms part of the strategic report in their annual report. LLPs should include it in either the energy and carbon report that forms part of the directors' report in their annual report, or for those LLPs which prepare a strategic report, in that report.

What happens in the event of non-compliance?

The Financial Reporting Council (FRC) is responsible for monitoring the contents of strategic reports and has the power ultimately to make an application to the court for a declaration that the annual report and accounts of a company do not comply, or a strategic report or a directors’ report does not comply, with the requirements of the Companies Act. The court may then order the preparation of revised accounts (including the revision of the strategic report) and other such matters the court thinks fit. 

The responsibilities of the company’s auditor still apply as with the rest of the strategic report. Accordingly, in instances where the auditor has reviewed the climate disclosures and determines these contain uncorrected material misstatements, this should then be recorded in the auditor’s report.

Recommendations of the Task Force on Climate-related Financial Disclosures (2017 Report). 

BEIS Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs (non-binding guidance) published February 2022.

A traded LLP is an LLP whose transferable securities are admitted to trading on a UK regulated market (which includes the Main Market but not AIM).

A banking LLP is an LLP which has permission under Part 4 of the Financial Services and Markets Act 2000 to accept deposits (but does not include one which has permission to accept deposits only for the purpose of carrying on another regulated activity in accordance with that permission).

]]>
{58547ED8-E108-490C-889D-5028BEDAE5E5}https://www.rpc.co.uk/perspectives/rpc-big-deal/fca-approach-to-part-vii-transfers/FCA approach to Part VII transfersTue, 03 May 2022 16:37:00 +0100RPC big dealInitial Considerations

The FCA encourages early engagement from any firm contemplating a Part VII transfer and expects to see a detailed proposed timetable for the transfer as early as possible. Any changes to the proposed timetable should be brought to the attention of the regulators swiftly to ensure they have time to approve any amendments, or plan resources accordingly. 

Firms are expected to include a broad description of the business to be transferred, including the classes of business, numbers of policyholders, number of open claims and any unusual or complex elements to the proposed transfer. 

The FCA requires a minimum of six to eight weeks to review the documents for the directions hearing and four weeks to review the documents for the sanction hearing. The FCA now suggests that this period of document review generally finishes when the applicants submit the documents to the Court ahead of the respective hearings. 

Independent Expert 

The Prudential Regulation Authority (PRA) is responsible for approving or nominating the person proposed as the Independent Expert (IE) but must consult the FCA before doing so. 

When considering whether to approve an IE, independence is key. In some circumstances, the FCA will object to IEs who have previously worked for the applicants. If the proposed IE intends to work as IE on two interacting projects concurrently or consecutively, they must be able to demonstrate that they can act independently. 

The IE will be required to demonstrate to the FCA that there will be no material adverse impact on policyholders either by lack of independence or insufficient skill, experience and/or resources. 

Firms will be expected to supply the FCA with the following information/documents:

  • A full CV.
  • A statement of independence and of capacity to do the work.
  • A draft letter of engagement including full details of the IE’s fees.
  • Details of the proposed peer reviewer (CV, Statement of Independence).
  • A full CV for each of the proposed principal team members expected to work on the project.

FCA's Overall Approach

The FCA expects applicants and IEs to submit near final documents for review. Any issues with the documents or any material conduct issues should be flagged to the FCA as soon as possible.  

The IE is expected to highlight any matters which could affect policyholders from a competition perspective. 

The applicants and the IE will be required to demonstrate that they have adequately considered any changes to how the business will be run or operated; the transfer's impact on vulnerable policyholders; that the policyholder communications have sufficiently described all areas of potential change which may have an adverse impact; and whether there are sufficient protections in the transfer documentation or proposals to mitigate against possible adverse impacts on policyholders.

Any objections from policyholders and other interested parties should be responded to in a timely manner. 

Scope of Transfer

There must be clarity as to the business and liabilities being transferred. The business being transferred must be clearly defined and identifiable. Where all the insurance business is being transferred, and the transferor will be applying to cancel its regulatory permissions following the transfer, the FCA expects all liabilities to be transferred.

Amendments to Policy Terms


The scheme document should provide for the FCA to be notified of minor or technical amendments to policy terms in advance to give it a reasonable opportunity (at least 28 days) to object. Where a change to policy terms is not required by law or regulation, the FCA must be satisfied that that there will be no material adverse impact on policyholders. 

The FCA may object to the use of powers that involve requests to the Court to exercise its powers to make ancillary orders (such as amendment to policy terms) in the context of a Part VII transfer. The FCA may question whether such proposed changes are necessary as part of the transfer. If the changes are considered necessary, they should be clearly and prominently notified to policyholders. The FCA may object if it considers the applicants are using the Part VII transfer artificially or opportunistically to inappropriately change provisions of the business. 

Communications Strategy

Applicants must confirm and demonstrate, subject to dispensation applications, that they have made all reasonable efforts to identify, trace and contact all relevant persons. The FCA are open to the use of digital communication methods for notification to some policyholders, although accept that this may not be adequate for all policyholders.

All communications will need to be easily understood by a person with limited technical insurance knowledge and not have a dissuasive effect. A key amendment to the previous guidance is that the legal notice is now required to include any previous names where the business has been in run-off. 

Firms are expected to provide freephone telephone numbers wherever possible and for phone lines to be open at appropriate times to include overseas policyholders (so not just 9am to 5pm UK time). Firms may be required to arrange for overseas call centres if proportionate and practicable in the circumstances. 

Conclusion

The changes reflect the increased scrutiny and role the FCA has taken with Part VII transfers. FG22/1 has provided more clarity to the expectations of the FCA in respect of insurance business transfers.

]]>
{CCCBEC17-8E87-44B9-A7B5-42A5683769D2}https://www.rpc.co.uk/perspectives/rpc-big-deal/electronic-signing-on-corporate-transactions-best-practice/Electronic signing on corporate transactions: What is current best practice?Tue, 26 Apr 2022 15:42:00 +0100RPC big dealElla ShanksIntroduction

Handwritten signatures have never been the ideal solution, being susceptible as they are to forgery, duress, etc.  Technology offers an alternative in the way of electronic signatures which come in many forms, some of which are capable of greatly reducing the risks inherent in the handwritten form.   

In its 2019 report Electronic Execution of Documents, the Law Commission concluded that existing legislation and case law are "sufficiently flexible to accommodate electronic signatures".  It confirmed that electronic signatures are valid for the vast majority of business transactions and legal processes and are capable of being used to validly execute a document, including a deed, provided that the person signing the document intends to authenticate the document and any execution formalities are satisfied.  

The EU eIDAS Regulation (adopted into UK law) breaks down electronic signatures into three categories: simple, advanced and qualified.  Simple electronic signatures are the broadest category, comprising anything which isn't an advanced or qualified signature – standard e-signing through a platform like DocuSign, AdobeSign or HelloSign falls into this category, as does a scanned signature.  Advanced and qualified electronic signatures (QESs) require additional levels of security, with QESs being the most secure (see below under "Future Reform" for further detail on QESs).

A number of recent publications have sought to provide guidance and "best practice" guidelines for managing an electronic signing process.

Industry Working Group on Electronic Execution of Documents

The Industry Working Group on Electronic Execution of Documents was convened in order to analyse the current situation, set out simple best practice which can be followed immediately by legal professionals (in-house and private practice) and businesspeople and to make recommendations for future analysis and reform.  It published its interim report on 1 February 2022.

The Working Group's five best practice principles are as follows:

  1. Agree as early as possible that a document is to be executed electronically and the procedure for doing so.  See below under "Networking for Know-How updated checklist" for more detail on how to adopt best practice here.

  2. Use a signing platform that provides a minimum set of security, safety and functionality with a strong audit trail which demonstrates an intention to sign by the parties.  As a minimum, such platform should allow signing parties to download / retain executed documents.

  3. Consider whether additional evidence is necessary and/or appropriate to record the fact that the signatory is approving the document.

  4. Where possible, provide multiple options to vulnerable clients or counterparties so they can adopt a method of signing that suits their needs.

  5. Authentication should be easier for those with secure digital identities (see below under "Future Reform" for further detail), but this should not be essential. 

Networking for Know-How updated checklist

In the wake of the Working Group's interim report, Networking for Know-How, an association of corporate professional support lawyers published an updated version of its checklist for managing such a signing in March 2022.  The checklist comprises template communications to be sent by a law firm either to all signing parties or just to its own client ahead of an electronic signing and provides a useful tool for law firms and clients alike to ensure all parties are prepared and clear on the signing process.

Included in the template communications is, by way of example, the following:

  • clear details of the law firms involved, the e-signing platform to be used and the documents to be signed both on and off the platform;

  • a schedule setting out the signatories' names and email addresses and noting who will sign which document;

  • signing instructions (including notifying the signatories that by signing electronically they will be confirming and acknowledging that they are the person to whom the signing invitation is addressed and that they approve the documents they are being asked to sign);

  • sample wording capturing how documents will be witnessed through the e-signing platform; and

  • sample wording to clarify the arrangements for dating the documents.

Witnessing

Current best practice guidance for witnesses stipulates that they should be:

  • over the age of 18;

  • not related to, married to or in a civil partnership or co-habiting relationship with the person whose signature is being attested;

  • not a party to any of the documents in question; and

  • physically present to witness the act of signing (whether applied electronically or otherwise) – virtual witnessing is not valid.

In light of COVID-19 and social distancing measures placing limits on the availability of physical witnesses, the Law Society confirmed in a 2021 Q&A that, where necessary, a child, spouse or other family member may witness a person's signature (unless they are also a party).  However, this should be avoided where possible as, should it later prove necessary to verify the circumstances surrounding the execution of the deed, the reliability of the evidence presented by a witness may be diminished if they are a minor or seen not to be independent of the signatory.

Future reform


In addition to best practice principles, the Working Group made a number of recommendations in its interim report for future analysis and reform. 

  1. One such recommendation was that digital identities – a virtual form of ID – should be made available as a matter of priority to all members of society who wish to have one, as is already the case in a number of European countries.  The report suggests that this will facilitate the uptake of electronic signing and help to modernise the approach to execution of documents in general. 

  2. The Working Group also supports the idea that "qualified electronic signatures" would be capable of replacing the need for physical witnesses and attestation of documents.  A QES offers the highest level of trust through an ID verification process which must meet multiple EU technical standards and be backed by a digital certificate issued by a trust service provider that is on the EU Trusted List and certified by an EU member state.  The Working Group noted that there was an argument to be made that a QES is likely to be more reliable than a signature witnessed in an unsupervised environment.  

  3. It also recommends that the government ensures that as many "official" documents as possible which the public may have to execute can be executed electronically (examples include lasting powers of attorney and wills).  The group considers that the government acting as an "early adopter" in this way will encourage the widest possible use of electronic signatures, ultimately saving costs and time.
]]>
{5B6D45D0-ADE9-4FB2-B29F-758A9B585338}https://www.rpc.co.uk/perspectives/rpc-big-deal/government-white-paper-on-corporate-transparency-and-companies-house-reform/Government White Paper on corporate transparency and Companies House reformThu, 07 Apr 2022 10:22:00 +0100RPC big dealAbdul WaliThis is in response to calls for a more robust and comprehensive framework to prevent fraud, money laundering and identity theft. An overview of the key changes proposed is set out below:

  1. Roles and powers of Companies House – the introduction of a new statutory role of promoting and maintaining the integrity of the register (currently, there are limited powers in respect of the accuracy of the information available at Companies House).  This will include: (i) a discretionary power to query and remove material which Companies House suspects is fraudulent or may compromise the integrity of the register or the wider business environment, and (ii) expanding the rules for filing documents at Companies House so that documents are subjected to verification checks before, and potentially after, they are accepted. 

  2. Company names – new powers to Companies House to query company names which are proposed or registered in various circumstances, such as where there is an indication of fraud or other criminal activity, and also to direct the company to change its name in the event that the register's queries are unsatisfied.

  3. Identity verification – changes to the rules on who is required to verify their identity will mean that all entities registered at Companies House will need to have at least one person associated with them on the register who has verified their identity.  Additionally, all new and existing company directors, Persons with Significant Control, members of LLPs, general partners of limited partnerships, directors of overseas companies and directors of Relevant Legal Entities will be required to verify their identity.  Companies will only be allowed to act as corporate directors if all of the directors of that company are themselves natural persons who have had their identities verified.  There will be a transition period after which non-compliance with identity verification rules could lead to criminal sanctions and civil penalties. 

  4. Data sharing – Companies House will have the power to share relevant data with law enforcement, public authorities, supervisory bodies and insolvency practitioners on a case-by-case basis.  This will apply to all information held by Companies House.  It will also have the ability to request data from public and private bodies and cross-reference any data received with the information it holds, for the purpose of improving the integrity of the register.

  5. Privacy and personal information – new specific powers that will allow Companies House to protect information from being displayed on the register in certain scenarios (such as where an individual is at risk of harm) and also a general discretion to remove or suppress personal information on the public register to allow Companies House to act swiftly if and when the need arises.

  6. Financial information – the Government also intends to implement enhanced validation checks on financial information provided to Companies House, such as in company accounts, but this will be limited to checking that the information delivered is complete and coherent.
    The changes are intended to be integrated in a way that does not undermine the low-cost and easy-to-use framework that currently exists, as well as compliment the Companies House 2020 to 2025 strategy, under which it seeks to transform digital services, improve security and implement data validation and verification measures. 
The changes are intended to be integrated in a way that does not undermine the low-cost and easy-to-use framework that currently exists, as well as compliment the Companies House 2020 to 2025 strategy, under which it seeks to transform digital services, improve security and implement data validation and verification measures. 
]]>
{FCAD3087-32E3-436A-A77F-F2989ABADE89}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-future-fund-two-years-on/The Future Fund - two years onWed, 16 Feb 2022 15:26:00 ZRPC big dealEdward ColvilleThe list of businesses which are now part-owned by the Treasury includes retailers like Planks, Pollen + Grace and Conilon (the holding company for Black Sheep Coffee), and tech companies like Plum (a fintech investment platform) and Glint Pay (a digital gold exchange).

Launched by the Chancellor in May 2020, the Future Fund offered UK-based companies an investment of between £125,000 and £5 million, provided that the Future Fund's investment was at least matched by private investors. There were no size or sector restrictions on the businesses which could apply for backing by the Future Fund, but the Government's publicity at the time focussed on small innovative companies, which were seen as critical to sustaining UK growth, given their potential for rapid expansion and job creation.  Although the BBB's investment was made by way of a loan note, the debt could convert to equity on certain trigger events, leaving the BBB with a minority shareholding in the borrower company.

The latest figures published by the BBB show that of the 1,190 companies which received funding totalling £1.14bn, a total of 265 companies converted their loans to equity by the end of 2021.  Although the triggers leading to conversion of the loans to equity include a sale or listing of the borrower, or maturity of the loan notes after three years, it's likely that the majority of the 265 companies converted their loans when going through a subsequent funding round.

The BBB has been keen to stress the importance of the Future Fund in keeping UK businesses afloat during a difficult lockdown period.  34% of Future Fund loans were made to technology and IP-based businesses, and the Future Fund hopes to share in any upside of the growth of these businesses over the term of the loans and any subsequent equity holding.  The BBB has also noted the number of businesses the Future Fund has supported which are outside London (41%), and which have mixed gender or ethnically diverse senior management teams (78% and 56% respectively).  While the Government may feel some of the businesses supported by the Future Fund encourage its net zero ambitions (e.g. Save Your Wardrobe, a sustainable fashion app, and Zero Carbon Farms, a sustainable vertical farming company), its shareholdings in other companies like an online betting exchange may prove more controversial over time. A full list of the companies in which the Future Fund now holds shares is available here

Overall, the Future Fund has been seen as a success for the Treasury, not just supporting UK businesses through the pandemic, but also encouraging growth across a range of UK start-ups.  Through its timely investment in these companies, the BBB also drove private sector investment in British companies.  Time will tell what return the Treasury sees on its investment, with further loans to convert to equity or be repaid over the next two years.  

Applications for the Future Fund closed on 31 January 2021, but the British Business Bank operates a number of other schemes providing similar investment to UK companies, including the Future Fund: Breakthrough, launched in summer 2021 to support high-growth, innovative companies. 

]]>
{62CC65BE-9F8B-44CF-9EBD-F05D9E427C58}https://www.rpc.co.uk/perspectives/rpc-big-deal/national-security-and-investment-act-is-my-transaction-in-scope/National Security and Investment Act – is my transaction in scope?Tue, 18 Jan 2022 09:59:00 ZRPC big dealNeil Brown1. Is there a "trigger event"?

The NSAI works by reference to "trigger events".  Broadly speaking, these are where a person gains "control" of:

i) an entity that is incorporated in the UK or which carries on activities in, or supplies of goods or services to, the UK (see NSAI s.7(2) and (3) for a detailed definition); or

ii) land, tangible moveable property or "ideas, information or techniques" used in connection with activities in, or supplies of goods or services to, the UK (see NSAI s.7(4) and (5) for a detailed definition).

Therefore, note that the NSAI can apply not just to company transactions, but also to asset transactions.

Control can include a minority interest (see NSAI s.8 and 9 for detailed definitions of control).

2. Is a mandatory notification required?

Transactions involving entities that operate in any of 17 specified areas of the economy require mandatory notification.  Note that mandatory notification can only apply to company/entity transactions, not asset transactions.

The 17 specified areas are:

i) advanced materials
ii) advanced robotics
iii) artificial intelligence
iv) civil nuclear
v) communications
vi) computing hardware
vii) critical supplies to government
viii) cryptographic authentication
ix) data infrastructure
x) defence
xi) energy
xii) military and dual-use
xiii) quantum technologies
xiv) satellite and space technologies 
xv) suppliers to emergency services
xvi) synthetic biology
xvii) transport

Detailed descriptions of what is included in each of these areas is set out in government guidance published here.

3. Should a voluntary notification be made?

 Even if a transaction is not in scope for mandatory notification, the government has the power to "call in" that transaction for review at any time up until 5 years after the transaction has completed.  Therefore, many parties to transactions may choose to make pre-emptive voluntary notifications to avoid the risk of a transaction subsequently being challenged or unwound.

To what extent a transaction is likely to be "called in", and therefore whether it is advisable to make a voluntary notification, is subject to the discretion of the government (more specifically, the Investment Security Unit which is the team within the Department for Business, Energy and Industrial Strategy (BEIS) which has been set-up to administer the NSAI).  The government will take into account the following risk factors:

i) the "target risk" – the nature of the target and whether it operates in an area of the economy where the government considers risks more likely to arise;

ii) the "trigger event risk" – the type and level of control being acquired and how this could be used in practice; and

iii) the "acquirer risk" – the extent to which the identity of the acquirer raises national security concerns.  This third factor is perhaps the most difficult and potentially controversial to apply. 

A government policy statement setting out more detail on the risk factors to be taken into account is set out here.

4. Conclusion

This blog is not a substitute for a full NSAI analysis.  However, it aims to help people understand the structure of the NSAI and the relevant questions to ask.

]]>
{08A2F513-321A-404C-9AC3-331A30AAF4CB}https://www.rpc.co.uk/perspectives/rpc-big-deal/lloyds-focus-on-a-more-sustainable-future/Lloyd's' focus on a more sustainable futureTue, 07 Dec 2021 09:49:00 ZRPC big dealLauren Murphy Lloyd's published its first Environmental, Social and Governance (ESG) Report at the end of last year and while this is a fairly new focus area for Lloyd's it noted that: a) in its history it has a long record of contributing to communities and helping them to recover from disaster; and b) the role that insurance plays in protecting society and supporting global economic growth. 

Lloyd's stressed its commitment to playing its part in the global transition to net zero; from the risks it shares and the investments it makes, to the way in which it supports societal progress more broadly. 

Some headlines from the ESG Report include:

  • setting targets for responsible underwriting and investment to help accelerate society’s transition from fossil fuel dependency, towards renewable energy sources.
  • Lloyd’s to phase out insurance cover for, and investments in, thermal coal-fired power plants, thermal coal mines, oil sands, or new Arctic energy exploration activities.
  • from 1 January 2022, Lloyd’s managing agents will be asked to no longer provide new insurance coverages or investments in the activities referred to above.
  • managing agents will be asked to phase out the existing coverages referred to above by 1 January 2030 to enable the market to support their customers who are making the transition away from these energy sources towards sustainable energy and business models.
  • committing to the phasing out of the market’s and the Corporation’s existing investments in thermal coal-fired power plants, thermal coal mines, oil sands, or new Arctic energy exploration activities by the end of 2025.

Since the publication of the ESG report, Lloyd's has since followed up with a roadmap for climate change setting out 'the sustainability and decarbonisation ambitions of the sectors that are critical to a successful global transition to a low carbon economy, together with a climate action roadmap that highlights the ways in which the global insurance industry will support and accelerate this transition and the delivery mechanisms which will be deployed'. 

The below provides a snapshot of the Lloyd's roadmap:

  • Now - immediate insurance industry action to de-risk critical decarbonisation activities, with particular focus on:
  • greener industry
  • greener transport; and 
  • greener industry.

  • Next - further enhance understanding of the evolving risk landscape for priority sectors.
    This involves Lloyd's:
  • leading a research initiative into construction materials and techniques in relation to creating a greener industry;
  • facilitating a product design sprint to develop and bring products to market in respect of greener transport; and
  • committing to expanding coverage to ensure capacity constraints don’t limit growth in respect of greener energy.

  • Beyond - deepen understanding of the risk ecosystem and stand ready to support emerging technologies. The global insurance industry will need to be aware of new technologies and adapt their offerings in the longer term to reflect new risks.
    This includes:
  • hydrogen power for home and public buildings;
  • development of substantiable fuels;
  • next generation nuclear technology; and
  • carbon capture and storage technology.

These ambitious commitments will impact the market and managing agents' business plans for the upcoming years. These goals, together with Lloyd's' renewed focus on people and culture, provide a clear vision for the future at Lloyd's. 

]]>
{82016D8C-2B41-4262-83D2-4209E47704C0}https://www.rpc.co.uk/perspectives/rpc-big-deal/equity-commitment-letters-are-they-enforceable/Equity Commitment Letters – are they enforceable?Wed, 24 Nov 2021 16:36:11 ZRPC big dealDavid WallisWhy is this interesting? In a word – "rarity" – this case is the first case of its kind on this subject. Although it is a decision on preliminary issues only, it is interesting to see how an English court interprets an equity commitment letter. 

Background: this case relates to: (i) the conditional purchase of a Spanish company that owned a hotel in Gran Canaria (the Hotel) for €93m pursuant to a sale and purchase agreement (the SPA) between private equity funds (the PE Funds), a newco acquisition company (the Buyer) and the owner of the Hotel (the Seller); and (ii) the construction of an equity commitment letter (the ECL). The ECL is governed by English law and the SPA is governed by Spanish law.  The SPA was subject to EU merger clearance which was subsequently obtained. 

COVID Affect: the PE Funds' case was that the consequences of the COVID-19 pandemic on the Hotel were catastrophic during the period between signing of the SPA and the obtaining of EU merger clearance: the Hotel was forced to close; tourists were prohibited from entering Spain; and restrictions on freedom of movement meant that Spanish residents could not visit the Hotel either. The Hotel's principal source of revenue dried up completely; and the Hotel faced severe disruption to its relationship with (among others) its customers, suppliers and employees.  

The Dispute: Against this COVID backdrop, the PE Funds contended that the SPA terminated, the principal reason being that the representations and warranties in the SPA, following the pandemic, could not truthfully be repeated at Completion. On the other hand, the Seller contended that the Buyer remained obligated to complete under the SPA and therefore sought to enforce the ECL against the PE Funds. 

What exactly is an ECL and why is it needed? 

Because a private equity buyer tends to use a new company structure on an acquisition, the buyer entity is often a newly formed company with little economic substance to it, because it will not receive its equity (and if applicable, debt) funding until just before completion occurs. Therefore, in transactions requiring regulatory clearance, where there is likely to be a period of several months between signing and completion, it is important for the seller to receive some form of comfort that the buyer will be able to meet its completion obligations to pay the purchase price to the seller. As it will be the individual private equity funds that will be funding the buyer, the current market practice is that those funds will sign an equity commitment letter addressed to the buyer agreeing (subject to the detailed terms of the ECL) to provide the funds before the date set for completion. The seller is then granted specific third-party legal rights to enforce the terms of this letter (sometimes, the seller can be a specific party to the ECL, although this is much less common in the US). In circumstances where there is also acquisition financing being provided to fund the purchase price obligation, then a debt commitment letter is usually also provided. 

Whilst a much shorter document in comparison to the SPA, the ECL is nevertheless a really important document in the terms of the transaction, because without it, the seller would only have recourse to a shell company with no meaningful assets. 

So, what did the court decide?

Because the SPA was governed by Spanish law, the key issues of when the completion date actually was and whether the SPA had been lawfully terminated fell to be decided under Spanish law.  At the time of the judgement in the English proceedings, that issue had not been determined. However, the English courts were able to make preliminary findings in relation to certain key issues as follows:

1. When does the PE Funds' obligation to fund arise?

The PE Funds' obligation under the ECL to provide the completion funds arose when the Buyer became unconditionally obligated to complete the SPA. In the court's judgement, that moment came when the condition precedent under the SPA was satisfied (the obtaining of EU merger clearance). Accordingly, the PE Funds became obliged to provide the completion funds by no later than 11:59 on the date prior to the date fixed for completion, unless the SPA was validly terminated prior to that date.  

2. Could the PE Funds argue that a fixed termination date (which fell after EU merger clearance being obtained) set out in the ECL meant that they were no longer obliged to provide the completion funds under the ECL as, due to ongoing litigation, that date had now passed?

The court construed the fixed termination date as being the date for determining whether the obligation to fund had arisen.  If the obligation to fund had arisen prior to the termination date, then the mere effluxion of time would not bring those obligations to an end. "It will not apply so as to bring to an end to the obligation where completion should have taken place but has not". (The court also made clear that any attempt by the PE Funds to deliberately delay and run down the clock – "the lapse argument" - would not result in the PE Funds being released from their funding obligations). 

3. Are the PE Funds required to provide the completion funds in circumstances where there is a dispute between the Buyer and the Seller under the SPA relating to completion?

Yes, "[the PE Funds are] not able to justify a failure to comply with their obligation by reference to the fact that the buyer has raised a dispute as to its obligation to complete on the Completion Date. Instead, [the PE Funds] must put the buyer in funds to enable the buyer to complete prior to that date; and if in fact, the buyer can establish that it is not obliged to complete, then it will have to return those funds to [the PE Funds], since those funds are not to be used for any purpose other than completion."

Conclusion

The English Court considered seven issues relating to the construction of the ECL and found for the Seller on six of those issues, with the crucial findings being that the key funding terms of the ECL were held to be valid and binding on the PE Funds.  Given the importance of the purpose of an equity commitment letter to a seller, this is a welcome decision.

 

Case referenced in this article: Lopesan Touristik S.A. V Apollo European Principal Finance Fund III (Dollar A) L.P, Apollo European Principal Finance Fund III (Master Dollar B) L.P, Apollo European Principal Finance Fund (Master Euro B) L.P, Apollo EPF III Capital Management LLC [2021] EWHC 2141 (Comm)

]]>
{8ECE823C-4824-447F-9A77-DAA530A825AB}https://www.rpc.co.uk/perspectives/rpc-big-deal/carve-out-deals-preparation-for-separation/Carve-out deals: Preparation for separationMon, 18 Oct 2021 12:35:00 +0100RPC big dealJeremy Cunningham, Ella ShanksCarve-out deals typically involve the sale of a specific business unit or division, with the seller retaining the remainder of the business.  As well as a way of shedding non-core assets, carve-outs can help companies strengthen their balance sheets by raising capital from disposals.  The coronavirus pandemic has encouraged companies to focus their efforts on the more "core" or profitable parts of their business and to consider selling  "non-core"  businesses or businesses which are non-efficient or consume too much management time.

 

Carve out deals Preparation for separation

The commercial rationale for carve out deals is often complex and mixed. Reasons can range from financial or investor related pressures to strategic or regulatory motivations, amongst others.  Sell-off businesses are often identified and prepared for sale on the basis that they have the potential to grow or to be valued or leveraged at different rates or in a different way compared to the retained business. 

Companies considering a carve-out deal should not underestimate the complexities that often accompany this kind of disposal – these complexities are best mitigated by thoughtful preparation.

Separation

The important legal, operational and financial considerations in a carve-out transaction often relate to separation issues.  These issues need to be handled carefully to avoid value leakage and loss of supply.  The following are some simple examples of items which are likely to be key:

  1. Employees
    The carved-out business and retained business will often share staff so TUPE and pension issues will need to be identified and addressed early.  If the buyer is proposing to make any changes to the employees' terms, benefits or pensions, these will all need to be closely analysed in light of relevant restrictions under TUPE. 

    2. Intellectual property
    Untangling IP rights used across different parts of the business can present difficulties, and the buyer will want to ensure that it acquires all the IP it needs to operate the carved out business, or ensure appropriate licences are put in place to the extent relevant IP rights cannot be acquired.

    3. Real estate
    Real estate arrangements will depend on whether the buyer will continue to operate the business from the same location post-completion, or whether the business will need to relocate.  Relocation can cause major business disruption, but often remaining in the same place will require alternative arrangements and often complex co-ownership arrangements being negotiated and put in place.    

    4. Financial and tax
    These will be areas subject to significant scrutiny. From a buyer's perspective assessing the value of the business to be carved out and operated on a standalone basis or as part of the wider buyer group often via separately prepared pro-forma financial statements for the purposes of the transaction will be critical.  How costs have been shared between the parent company and the business being span out will also impact value and be a key area of the financial due diligence.

Preparation

Early preparation is critical for a carve-out deal. 

By giving due consideration to how assets are to be separated and the structure needed ahead of going to market, sellers can enter into negotiations with a much clearer view of any potential issues. As a result, sellers are more likely to avoid delays, enjoy a competitive auction and avoid price chips during negotiations.

Common examples of major problems which arise and can derail carve-out deals are:

i. due diligence uncovers that a certain part of the spun-out business is crucial to the continued operation of the retained business to the extent that separation is unfeasible;
ii. the seller finds that a large tax liability will arise on separation;
iii. failure to obtain shareholder or third-party consent(s) to the sale; or
iv. failure to obtain all relevant regulatory approvals.

As a buyer, the integration of the target business into its own group needs to be reflected in the deal structure.  

Transitional services agreements are widely used in carve-out deals to preserve business continuity – they typically require the seller to continue to provide certain services to the carved-out business following the sale, such as IT, payroll, tax, HR and other business support services. Ensuring the right transitional services arrangements are in place is important for successful integration.

It is rare for a disposal not to have some element of separation these days. Businesses rarely operate on a truly stand-alone business within corporate groups. 

]]>
{E7B0BB56-D822-4331-8829-B2AF5F92D194}https://www.rpc.co.uk/perspectives/rpc-big-deal/turning-the-ratchet-understanding-anti-dilution-rights-in-venture-capital/Turning the ratchet - understanding anti-dilution rights in venture capitalWed, 13 Oct 2021 15:00:00 +0100RPC big dealWhat are anti-dilution rights?

Anti-dilution rights are a form of economic protection for an investor against the valuation of a company dropping following its investment.

To reduce venture capital investment down to its crudest level, investors invest money in companies to help them develop and to drive the valuation of the company up.  However, to borrow from A Midsummer Night's Dream, the course of true love investment never did does not always run smooth.   

After taking on one round of venture capital investment, early-stage companies may find themselves needing to go through a further funding round where the valuation of the company is lower than the valuation determined by the investors in the previous round – or what is commonly known as a "down round". It is on down rounds where anti-dilution rights come to the fore.

What do anti-dilution rights do?

Where a company issues additional shares (or convertible securities) to new investors at a price that is lower than the price paid by previous investors, any previous investors who have anti-dilution rights will have the right to receive additional shares at no or minimal cost in order to compensate them for their economic dilution.

What do you mean by economic dilution?

The issue of shares to investors in a company establishes the share price and total valuation of a company.  The value of an investor's stake in a company will be reduced (or "diluted" from an economic perspective) if a new investor pays a lower price per share for its investment than the original investor paid in an earlier round of financing. 

How do you determine how many shares the original investor will get when anti-dilution rights apply?

The precise number of shares to be issued on a down round to investors with anti-dilution rights depends on whether the anti-dilution protection is calculated on a full ratchet basis or a weighted average basis:

  • full ratchet protection is very investor-friendly and has the effect of putting the investor in the position as if it had invested for shares at the share price established in the down round.  In effect, the original investor gets to reprice the full amount of its investment at the new, lower share price.  Importantly, a full ratchet mechanism is binary - it takes no account of the proportionate effect of the down round (ie. the amount of money being raised in the down round), and therefore can have extreme consequences for other shareholders, who may find their shareholdings being heavily diluted by a wholesale repricing of a prior investment.

     

  • a weighted average provision takes a more balanced approach, and takes into account the number of shares issued at the reduced price in repricing the original investment.  It balances the valuation of the company against the total capital increase in the dilutive financing round. Accordingly, a down round in which £500,000 of capital is raised will result in a significantly smaller number of anti-dilution shares being issued to the original investor than a round at the same price in which £5 million of capital is raised, because proportionately the impact of a smaller raise is less economically dilutive to the original investor than a large raise.

It is important to note that full ratchet protection is very unusual and, on the UK venture scene, anti-dilution rights predominantly apply a weighted average basis to determine the number of new shares to be issued.

How does that work from a practical point of view?

In the UK, venture deals incorporating anti-dilution rights typically provide for investors to be issued with new shares structured as a bonus issue of shares paid for by a capitalisation of reserves (eg. the share premium account).  However, if the company does not have sufficient reserves to capitalise to make the bonus issue, investors will usually be able to subscribe for the new shares at nominal value instead. It is for this reason that shares which carry anti-dilution rights should, from the perspective of an investor, carry a low nominal value.  

So what should a founder do if they see anti-dilution rights in a term sheet?

The first thing to bear in mind is that anti-dilution rights are not unusual.  It is certainly not the case that they appear in all UK venture deals, but they are very common (you won't generally see them being requested on angel investments in the UK as they will prevent the angel investors obtaining SEIS/EIS tax reliefs).  With that as a backdrop, here are four key things for founders to consider when an investor requests anti-dilution rights:

  1. Valuing early-stage companies is sometimes more of an art than a science.  I have written previously about the importance of founders raising investment using realistic valuations and how a founder who pushes extremely hard for an optimistic valuation may end up having to accept some deal terms which give greater protection to an investor than if a more realistic valuation had been pursued (see, for example, my article on liquidation preferences which notes that a founder giving an investor a strong liquidation preference (eg. a participating preference) is effectively a side bet between the investor and the founder regarding the true valuation of a company).  A similar point is true of anti-dilution rights.  Remember that anti-dilution rights only apply on a down round.  Accordingly, founders can mitigate the impact of anti-dilution rights by ensuring that valuations are realistic at the time of raising an investment so that, unexpected downturns aside, the likelihood of a down round is reduced.  As the well-known venture capitalist and blogger Brad Feld writes, founders should focus on "(a) minimizing [the] impact [of anti-dilution rights] and (b) building value in [their] company after the financing so they don’t ever come into play". 

     

  2. Founders should also consider whether any rights they hold (eg. board rights, veto rights, etc) are linked to them continuing to hold a certain percentage of the share capital in the company, and consider what the impact could be on these rights in a scenario where further shares are issued to investors under anti-dilution provisions on a down round.

     

  3. Full ratchet anti-dilution rights are very uncommon at the time of writing (October 2021) and a founder should consider very carefully the possible commercial implications for a company of giving these rights to an incoming investor.  Full ratchet anti-dilution rights can hamstring a business which suffers an unexpected downturn by, effectively, making a down round viable only as a matter of a last resort.

     

  4. Finally, as with all contractual protections, it is important to bear in mind that the true power of anti-dilution rights sometimes lies in the negotiating power they bestow on an investor. Where a company goes through a down round, anti-dilution rights – however structured – have the effect of diluting founders at the expense of investors.  It is a key principle of venture capital investing that, for a company to flourish, its management team must be properly incentivised in terms of their equity stake in the business.  An enforcement of contractual anti-dilution rights in full could have a demotivating impact on a management team if it dilutes a founder's shareholding too much.  Therefore, the power of anti-dilution rights in this scenario is often to give the investor leverage to negotiate new contractual rights or to assume more control over the terms of the down round.
]]>
{6A2C5790-6476-4E32-8C96-C1B54D0F7EE5}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-rise-of-esg-finance/The rise of ESG financeFri, 01 Oct 2021 10:30:00 +0100RPC big dealSukh AharkESG (Environmental, Social and Governance) finance remains a hot topic and continues to grow rapidly, with Bloomberg predicting the $2.2 trillion ESG debt market to hit $11 trillion by 2025, based on the rate of growth during the past five years.

Green finance first emerged as a solution for funding environmentally friendly projects, such as renewable energy plants.  However, in recent years, with an ever increasing social and political demand to tackle social issues alongside environmental issues, we have seen green-lending evolve more broadly into ESG finance which, along with environmental concerns, also takes account of wider social and governance targets and KPIs.  

ESG finance encompasses a broad range of products, but in terms of debt, there are two main types of ESG lending products available to borrowers; (1) green loans and (2) sustainability linked loans (SLLs).  An important distinction between green loans and SLLs is to do with the use of proceeds and the pricing of the loan.  The proceeds of green loans must be used for environmentally focused projects (such as the development of a recycling plant). SLLs do not have specific requirements as to use of proceeds, instead the ESG-aspect is seen through the linking of pricing to the borrower's performance against specific ESG metrics.  In early versions of SLLs, borrowers would be incentivised with lower margins if they hit their ESG targets, however now SLLs will often have a two-way pricing mechanism, where the borrower pays less if it hits its targets and more if it fails to reach them.  

The development of SLLs has opened up the world of ESG financing to borrowers across different industries, not just those involved in environmentally focused projects.  

Once previously available only in institutional markets, ESG financing is now more widely available, with Virgin Money releasing SLLs in March 2021 in its commercial banking offering, making it the first bank in Europe to offer SLLs to commercial customers.  The growing industry is not only borrower driven with an EY report conducted in 2020 finding that 52% of banks view environmental and climate change as a key emerging risk over the next five years, up from 37% in 2019.  

Cheaper pricing is an obvious incentive for borrowers, however another benefit of ESG financing is the positive PR credentials it can bring. 

The benefits of being able to show ESG targets, commitments and credentials are clear to see with public sentiment for environmental and social issues being stronger than ever.  Consumers are not only more interested in ESG issues, they are also becoming more knowledgeable and more aware of corporate green-washing.  Borrowers accessing ESG financing will need to prove performance against their ESG targets not only to access cheaper pricing, but also to retain their consumers.  An April 2020 consumer study conducted by Kearney showed 83% of respondents said they consider environmental impacts when making purchasing decisions, up from 71% in 2019.  Borrowers will also need to consider how business is conducted emerging from the covid-19 pandemic, with the same Kearney study showing 48% of respondents said the pandemic has made them more concerned about the environment.  Utilising ESG-linked facilities could be a valuable tool for borrowers to show their ESG commitment to consumers.

On 9 June 2021, the Green Taxonomy Advisory Group was launched by the UK Government; an independent expert group established to oversee the delivery of a common green investing framework and to crack down on green-washing.  This is focused at green investing rather than lending; however, it is an example of the growing demand for ESG claims to be substantiated and the need for borrowers to be squeaky clean in their ESG claims. 

Lenders also have PR considerations, particularly in the context of charging increased margins for poor performance against ESG metrics.  If the goal of ESG finance is to promote sustainable development, then lenders can be in a difficult position if they are seen to be benefiting from a borrower's poor ESG performance.  We may see lenders ringfencing proceeds from increased margins and applying them towards ESG-focused initiatives.

]]>
{AD00235E-89E2-45DC-81C7-F3189702BEDD}https://www.rpc.co.uk/perspectives/rpc-big-deal/balance-on-the-board/Balance on the board: Eight things UK PLCs need to know about the FCA's diversity targetsMon, 27 Sep 2021 11:12:31 +0100RPC big dealKaren Hendy, Connor Cahalane
  • Which companies will the disclosure requirements apply to?

    The proposals will apply to all UK and overseas companies with shares listed on the premium or standard segment of the FCA's Official List. AIM companies are outside of the scope of the new rules.

  • When will the new rules come into effect?

    If adopted, the rules will apply to accounting periods beginning on or after 1 January 2022 and would require disclosure in annual financial reports published from spring 2023.

  • What disclosures will companies need to make under the rules?

    Listed companies will need to include in their annual financial reports:

    • a 'comply or explain statement' on whether they meet the FCA's targets (see below) for gender and ethnic minority representation on the board of directors;
    • any changes to the board that have materially affected the company’s ability to meet one or more of the targets;
    • details (numbers and percentages) on the gender and ethnic diversity of individuals on the board, senior board positions (Chair, CEO, CFO and Senior Independent Director), and the executive management team; and
    • as part of the corporate governance statement, a description of how the company's diversity policies apply to the remuneration, audit and nominations committees of the board (as well as to the board itself).

    The FCA proposes that "executive management" will include the executive committee or the most senior executive or managerial body below the board (or where there is no such formal committee or body, the most senior level of managers reporting to the chief executive), including the company secretary but excluding administrative and support staff.

    The new rules will also clarify that a company's corporate governance statement must describe the company's diversity policy on ethnicity, sexual orientation, disability and socio-economic background in addition to age, gender, and educational and professional backgrounds as required under the existing rules.

  • What are the proposed diversity and inclusion targets?

    Companies will need to disclose whether they have met the following targets:

    • at least 40% of the board are women (including individuals self-identifying as women);
    • at least one of the senior board positions (Chair, CEO, CFO and Senior Independent Director) is held by a woman (including individuals self-identifying as a woman); and
    • at least one member of the board is from a non-white ethnic minority background (as categorised by the UK Office for National Statistics[1]).

    Balance on the board: Eight things UK PLCs need to know about the FCA's diversity targets

  • What will happen if a company fails to meet these targets?

    Similar to other 'comply or explain' requirements, each company will need to disclose if it has failed to meet any of the diversity and inclusion targets and the reasons for not meeting those targets. However, failure to meet the targets will not be breach of the Listing Rules.

  • What level of data on diversity needs to be disclosed?

    Companies will need to disclose the number of board members using specified categories for gender and ethnicity, the relevant percentage of the board, the number of senior positions on the board represented, the number of executive management positions represented and the percentage of executive management. This information must be set out in a table in a prescribed format (set out in the FCA's consultation paper).

  • Where will the new rules be set out?

    The FCA is proposing to amend the Listing Rules (LRs) and Disclosure Guidance and Transparency Rules (DTRs), in particular LR 9.8 (Annual financial report), LR 14.3 (Continuing obligations) and DTR 7.2 (Corporate governance statements). Draft text for the new rules is set out in an appendix to the FCA's consultation paper (CP21/24).

  • Why is the FCA introducing these new rules?
    The FCA hopes to increase transparency for investors on the diversity of boards and executive management of UK listed companies. It notes that similar disclosure requirements are being introduced in other jurisdictions, including NASDAQ's US Exchange.

    The proposed rules continue the trend of increased non-financial disclosure requirements for UK listed companies. In January 2021, the FCA introduced requirements for listed companies to confirm if they followed the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) (see our Blog for details).

    The FCA's consultation closes on 20 October 2021 and it expects to finalise the rules by late 2021.

  • ]]>
    {9B9D8E25-ED1B-48D5-9E33-77F9796372BB}https://www.rpc.co.uk/perspectives/rpc-big-deal/takeover-code-what-has-changed/Takeover Code: What has changed?Mon, 13 Sep 2021 14:19:00 +0100RPC big dealEmily McGregor
  • Regulatory clearances

    Conditions relating to competition clearances from the Competition and Markets Authority (CMA) and European Commission are no longer treated differently to other regulatory conditions. 

    As such, a bidder will no longer be able to walk away from an offer automatically simply because there is a "Phase 2" CMA or European Commission reference.  Consistent with the position in respect of other regulatory conditions, a bidder will now need to establish material significance in the context of the offer in order to invoke a relevant competition condition and lapse its bid.

    This will make it much more difficult for bidders to withdraw, delay or amend an offer based on UK and European competition conditions.  In turn, there is likely to be greater certainty for target shareholders that announced bids will proceed to completion.

  • Offer timetable

  • The revised Code introduces a number of key changes in relation to the timetable for contractual offers:

    • There is now a "single unconditional date" by which all conditions must be satisfied (which is initially set at Day 60 but may be shortened by the bidder making an "acceleration statement"). There is no longer a distinction between the date on which a bid is unconditional as to target shareholder acceptances and the date on which the bid is wholly unconditional.  This is to avoid target shareholders being "locked in" to an offer for a long period after it has become unconditional as to acceptances but before it has become wholly unconditional.
    • The acceptance condition (relating to obtaining the minimum number of acceptances by target shareholders) must now be the last condition to be satisfied. Target shareholders can withdraw their acceptances at any time right up until the end of the offer and will not be locked in pending satisfaction of other conditions (previously, withdrawal was only possible within a prescribed window).
    • There is a new requirement for the bidder to include a "long-stop date" on contractual offers, which is the latest date by which all conditions must be fulfilled.
    • Previously, where the acceptance condition was not reached, the bidder was able to choose whether to extend or lapse its bid without forewarning the target shareholders.  Under the revised Code, if the bidder intends to lapse its bid on the basis of insufficient acceptances, it must give target shareholders 14 days' notice of its intention to do so.  This provides much more certainty for target shareholders and replaces the current system of "closing dates".
    • There are new prescribed dates on which a bidder will be required to announce target shareholder acceptance levels.
    • There is a greater ability to suspend the contractual offer timetable to facilitate regulatory clearances.  This reflects that regulatory processes are on average taking much longer than in previous years and clearances are likely to be required more often, for example under the new UK national security regime (for more information on which, see "National Security and Investment Bill – when will it come into force?").  

    This greater flexibility will in practice have the biggest impact on hostile bidders who may have previously struggled to satisfy all conditions within the previous 81 day deadline (which was less of an issue on a recommended offer, where the timetable could normally be extended with consent of the target board).

     

    ]]>
    {66527014-1673-413F-9BFE-2ED2595C54A4}https://www.rpc.co.uk/perspectives/rpc-big-deal/directors-duties-and-conflicts-of-interest-application-to-former-directors/Directors' duties and conflicts of interest – application to former directorsMon, 28 Jun 2021 14:10:00 +0100RPC big dealBen MagahyIntroduction – conflicts of interest

    Directors of companies have a duty to avoid a situation in which they have an interest that conflicts or may conflict with the interests of the company, in particular as regards the exploitation of any property, information or opportunity. This duty, now set out in section 175 of the Companies Act 2006, arose out of the equitable principles that directors must not place themselves in a position where their interests conflict with those of the company, and should not profit at the company's expense or use the company's property to make profit for themselves.

    In particular, the case law was concerned with directors who exploited for their own benefit a 'maturing business opportunity' of the company. In accordance with the fiduciary nature of the principle, a breach could occur regardless of whether the company itself could have profited from the relevant opportunity. 

    Prior to the Companies Act 2006, it was recognised in the case law that directors could not escape these duties by resigning their positions as directors to exploit the relevant property, information or opportunity. Directors who tried to do so would be found to have breached their duties and to account for the profits made. It was generally seen as a requirement that there should be a causal link between ceasing to be a director and a desire to exploit a maturing business opportunity which the former director had become aware of while in office – the claim was therefore said to be founded on conduct prior to or at the time of resignation. No breach could occur for post-resignation acts.

    When the Companies Act 2006 codified the various directors' duties, the application to former directors of the duty to avoid certain conflicts of interest was set out in section 170(2)(a) as follows:

    "(2) A person who ceases to be a director continues to be subject–
    (a)  to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and
    (b) […]
    To that extent those duties apply to a former director as to a director, subject to any necessary adaptations."

    The wording of section 170(2)(a), and whether it constituted any change to the duty as it had been understood in the pre-codification case law, has recently been considered by the High Court in Alan Burnell v Trans-Tag Limited, Robert Aird [2021] EWHC 1457 (Ch). 

    Burnell

    The facts of Burnell are complicated and concern claims and counterclaims related to the collapse of the business of Trans-Tag Limited. Among other things, it concerned a de facto director who, having ceased to hold office with the company, had subsequently put himself in a position whereby he could exploit certain rights of the company under a license agreement of which he had been aware as a director. It was accepted by the Court that the former director's resignation had not been prompted or influenced by a desire to exploit the company's property, information or opportunity. A key area of contention was therefore whether section 170(2)(a) had changed the law so that a director's conduct after leaving office could found a claim for breach of the continuing section 175 duty. Ashely Greenbank, sitting as a Deputy Judge, held that the wording of section 170(2)(a) had indeed constituted a change in the law. 

    Under the pre-codification case law, a director's conduct after leaving office could not of itself amount to a breach of duty – any claim had to be founded on the director's actions before or at the time of ceasing to be a director. The justification was that a fiduciary duty could not survive the end of the fiduciary relationship. Conduct after leaving office could only be relevant where the director's resignation had been prompted or influenced by a wish to acquire a maturing business opportunity for the director's own exploitation – if the directors then exploited that opportunity after leaving office, a breach of duty arose because the former director had shown a lack of good faith in exploiting an opportunity that had been planned while in office. It therefore followed that where the former director had left office for reasons not connected with the relevant opportunity, there was no breach if they subsequently pursued the opportunity having left office.

    The wording in section 170(2)(a), however, states that the director continues to be subject to the section 175 duty in relation to the exploitation of property, information or opportunity the director had become aware of while in office. As stated in Burnell, this implies that the conduct of a director after resigning from office can give rise to a breach of the continuing section 175 duty, and that it is not a requirement that a director's resignation must have been prompted or influenced by the director's wish to exploit an opportunity belonging to the company. If a former director exploits property, information or opportunity they became of while in office there may be a breach of duty, in contrast to the previous body of case law.

    Analysis

    The interpretation of section 270(2)(a) in Burnell entails an extension of the duty as it had previously been understood, as acknowledged in the judgment. Former directors who take up positions in competing businesses therefore need to be cautious as to how they use information and opportunities which they may have become aware of in their previous roles, as it is unlikely that the company of which they were formerly a director will have authorised any conflict arising. 

    However, the judgment also notes that the continuing section 175 duty is limited to the exploitation of "any property, information or opportunity" of which the director became aware while a director, and that this phrase is given a narrow interpretation in the case law. In particular, this had to be understood in the context of exploitation of a maturing business opportunity. It may be the case that future decisions will focus on this strand of case law and further explore the question as to how well developed such an opportunity needs to be to form the basis of a claim for breach of duty. 

    Furthermore, the judgment stated that as the Court takes a merits-based approach in assessing whether a breach has occurred, evidence as to pre-resignation as well as post-resignation conduct of a former director is likely to continue to be relevant to future cases.

    ]]>
    {65A4C4A1-0A04-4FD6-BDF8-7CC0A5F1C7BE}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-beginning-of-the-end-for-tax-havens/The beginning of the end for tax havens?Tue, 08 Jun 2021 11:01:00 +0100RPC big dealBen RobertsThis blog looks at what has been 'agreed' and some of the challenges that lie ahead before reform of the international tax rules can be achieved.

    Described by the UK government as a "seismic" agreement to ensure that the largest multinational tech giants pay their "fair share" of tax in countries in which they operate, the identity of the (US-headquartered) multinational companies that are the target of these proposals is no secret.
    There are, in fact, 2 "pillars" to the announced 'agreement':

    1. reform of the international tax regime so that certain multinational companies will be required to pay tax where they do business (this pillar has been driven by the major European economies).
    2. a global minimum corporate tax rate of "at least" 15% in each country in which multinational companies do business (this pillar is of utmost importance to the US).

    Any agreement to reform the international tax regime would be the first for over a century. The rules have been dismissed as no longer being fit for purpose, in particular in a world where business is increasingly digitalised such that it is no longer necessary for multinationals to have a physical presence in the jurisdictions in which they do business.

    This first-step has been a long-time coming. Efforts to reform international tax rules started in 2013, with the publication of the OECD's Base Erosion and Profit Shifting (BEPS) action plan. It has been suggested that the change of administration in the US has provided momentum to reach this point. Another theory is that desperation to raise funds from tax revenues, driven by the Covid-19 pandemic, has also spurred governments into action.

    However, this is far from the end of negotiations and perhaps is better viewed as being the beginning of the final stage of reaching an agreement. There are numerous hurdles still to be overcome, including:

    • agreement as to the precise details of the new international tax regime. The UK government's press release states that only the "largest and most profitable" multinational companies will be caught. Global firms with at least a 10% profit margin would have 20% of any profit above the 10% margin reallocated and subjected to tax in the countries in which they operate. Exactly how this threshold applies, and the detailed definitions and concepts that will undoubtedly be required in order to make this work, remain to be seen.
    • agreement as to a global minimum corporate tax rate. G7 ministers have proposed a global minimum rate of "at least" 15%. 
    • countries such as the UK, France and Italy agreeing to abolish their 'digital' tax regimes. In the UK, the digital services tax (DST) has been in place since April 2020. The UK government has always stated that the DST is an interim measure only, to be repealed once an "appropriate international solution" has been agreed to the perceived problem faced by countries such as the UK; the inability to adequately tax highly digitalised businesses operating in a given jurisdiction without a physical presence there. The US has consistently labelled such unilateral digital taxes as unfairly targeting US tech companies. Whether the US requires these national taxes to be repealed before the US legislates to enact any globally agreed approach, is unclear.

    There has already been criticism of the proposed 15% minimum corporate tax rate. Commentators, campaigners and charities say this has been set far too low and that at this rate it would fail to end the so-called "race to the bottom" of falling corporate tax rates. No doubt that G7 nation ministers will point to the fact this has been phrased as "at least" 15%, holding out the possibility that this minimum rate may rise. Indeed, the French finance minister has called this a starting point and has said that he will fight to make the minimum tax rate as high as possible.

    Next steps?

    The proposals will be discussed in more detail at the planned 'G20' meeting of Finance Ministers and Central Bank Governors in July. After that, the detail underpinning the proposed new regime will need to be agreed by the 139 nations that make up the OECD.

    The G7 proposals, whilst historic, are surely only the beginning of a process. To succeed, the proposals will need much wider backing from nations such as China and India. Not to mention jurisdictions such as Ireland (with a current corporate tax rate of 12.5%).

    Initial responses from the US tech companies most likely to be affected by any new rules were supportive. Those companies will almost certainly have much to say about the detail of any new global tax regime.

    ]]>
    {AA136E86-4FA0-4BF1-B63F-B1D630677C91}https://www.rpc.co.uk/perspectives/rpc-big-deal/japans-quiet-approach-to-crossborder-investment-is-changing/Japan's quiet approach to cross-border investment is changingThu, 06 May 2021 12:05:20 +0100RPC big dealNigel CollinsSee: link

    Japan’s social culture has coloured its business activities for generations and helped make its manufacturing sector in particular a huge success. But that culture of doing business is evolving quickly, by Japanese standards. As a result of a combination of international influences, pressures from investors and government regulators and a shifting global economy.

    In particular, the country’s international M&A activity and investments abroad, which were almost entirely halted during the 2020 as a result of the pandemic, are returning to life. Investors are expecting a surge in deals along with subtle changes in the way Japanese leadership conducts business. Pressures at home from an aging workforce and a declining population, along with pressures to create a green economy and recent growth in shareholder activism, are generating a mounting sense of urgency to demonstrate new robust growth to shareholders and investors.

    Deal activity levels

    Domestic deals in Japan remained very active last year. But with outbound M&A, the number of deals decreased 32.6 percent. As a whole, deal value went down by almost 60 percent last year which is a huge drop. On a positive note, Japan Inc is well-positioned to do deals coming out of the pandemic. See link for a view on this.

    Two big trends

    Midsize corporates continue to follow the larger Japanese corporates overseas and a growing drive into the green economy.

    If you go back 10 years, a lot of that M&A was in the manufacturing sector. Over the last 10 years many of the big Japanese corporates, large manufacturers, major banks and insurance companies, large complex organisations like Hitachi and the trading houses have conducted a lot of M&A all over the world. In typical Japanese fashion, midsize companies have followed the larger Japanese corporates. These midsized companies are still very big companies in the context of UK and European markets.

    The drive into the green economy is accelerating. Companies like Mitsubishi Heavy Industries and Toshiba have announced ambitious mid-term management plans based on decarbonisation of industry for the years ahead. There’s a lot of interest and investment into green and blue hydrogen, ammonia, carbon capture, battery storage and other green energy projects. Europe has a lot of new technology in these sectors and is ripe for more Japanese investment. One of the challenges for Japan Inc will be finding the right opportunities and partners as this is a hot market with increasing valuations and tough auction processes to navigate, favouring fast movers and big spenders.

    Restructuring of minority investments

    There’s also been a wave of restructuring. There were a number of investments by trading houses into tech businesses around five years ago, but over the last couple of years, a lot of those investments have stopped. They are realising that unless they set up a specific venture capital business, they’re not necessarily the best businesses to be making those investments and holding them over the longer term. So, there’s been a number of restructuring of those investments throughout the pandemic.

    Changing approach of Japanese CEOs

    When we look at companies like SoftBank or Fast Retailing (owner of Uniqlo), they are led by founders and strong entrepreneurs. A lot of Japanese companies with those sorts of CEOs have been very active and very successful in the global market. That’s a recent phenomenon. Traditionally, it was mostly car manufacturers that were the big players. But now we’ve started to see more companies led by strong CEOs, willing to engage in very difficult M&A activities. So, things are definitely changing. We are starting to see strong leadership and passion about the businesses they are buying.

    The gap between a traditional Japanese style of CEO and Western CEO is narrowing. There are a couple of trends I've seen in recent years. One is that large Japanese corporates have been bringing in investment bankers and professionalising their M&A teams. That drives a more international approach. Midsize corporates will follow that over time. These more professional M&A teams have a lot of influence these days on strategy, execution and post-merger integration.

    Another trend is where talented people have been sent abroad to gain international experience, they are returning and now being given the opportunity to influence the company at headquarter level back in Japan. Historically, some of these returnees were less influential. I see that in some larger companies these people are now exerting real influence on strategy and business practices, bringing in a lot of international knowledge. Japanese corporates are much more open these days to taking advantage of this knowledge and helping to narrow the gap between the very traditional Japanese CEO and the and the more hands-on Western CEO.

    It will be interesting to see whether the growing number of these dynamic CEOs can forge a new direction for Japanese business.

     

    ]]>
    {9C7FAD20-ACF0-4309-AD0D-F9A611E855B6}https://www.rpc.co.uk/perspectives/rpc-big-deal/expert-determination-of-completion-accounts-and-manifest-error/Expert determination of completion accounts and "manifest error"Tue, 06 Apr 2021 14:50:31 +0100RPC big dealThis narrow interpretation by the courts has been emphasised again in the recent case of  Flowgroup plc v Co-operative Energy Limited

    Facts 

    In May 2018, Flowgroup plc (Seller) sold to Co-operative Energy Limited (Buyer) the entire issued share capital of Flow Energy Limited. The share purchase agreement (SPA) set out a completion accounts adjustment of the purchase price. The parties were unable to agree on the amount of the adjustment and referred the matter to an accounting expert in accordance with the terms of the SPA. The expert's report was favourable to the Buyer. The SPA also set out that the expert's decision on matters referred to her "will be final and binding in the absence of manifest error." The Seller challenged the expert's report in the High Court on the basis of manifest error. 

    Manifest error

    The Seller's position was that an error was "manifest" when it could be shown to be wrong when compared with the correct answer. The Buyer's position was that a manifest error had to be something more than simply providing a wrong answer, the error must be what can only be described as a "howler". 

    The court preferred the reasoning of the Buyer. The courts emphasised that it is a well-established principle that the circumstances where an expert's determination can be challenged are tightly defined. A manifest error exception therefore only allows recourse to the court in limited circumstances. The Seller's proposed approach of simply presenting an error provided no real filter to the scope of any challenge. The risk would be that the courts would simply become an alternative forum for the party dissatisfied with the expert's conclusions.

    The Seller also argued that since there is only one interpretation of a contract, where an expert misinterprets the contract and proceeds to make a determination which is founded upon that misinterpretation, there must, by definition, automatically be a manifest error. The court also rejected this argument. 

    The court found the correct approach would depend on the scope of the expert's engagement. If, pursuant to the terms of the SPA, the expert is engaged to make a determination based on contractual interpretation, the outcome of the determination itself would still need to be shown to be manifestly erroneous i.e. more than just simply providing a wrong answer. 

    In Flowgroup, the engagement of the expert accountant was broad and expansive and included, where necessary, the ability to determine issues of contractual interpretation if necessary to resolve the matters in dispute. It was not the role of the court to second-guess the expert's accounting judgement, unless it was very clear that the accountant's judgement was affected by a material mistake. In Flowgroup, no such error had been made.   

    Comment

    When negotiating completion accounts clauses, it is advisable the SPA sets out in very clear terms how the parties intend the price adjustment should be calculated. A suggestion would be to attach a worked example as a schedule or appendix to the SPA. This will help the parties understand how the accounting hierarchy and principles will be applied to the final purchase price, prior to signing the agreement. 

    While the parties may agree to resolve any disputes through negotiation or referral to an expert for final determination, the parties are likely to have very limited recourse in the event of an unfavourable expert determination (even if the SPA makes an exception for manifest error) as the courts view manifest error in very narrow terms. 

    ]]>
    {C492CECB-7598-4E85-A8C8-855179829AA3}https://www.rpc.co.uk/perspectives/rpc-big-deal/insurance-m-and-a-and-financing-q1-2021/Insurance M&A and financing Q1 2021Mon, 22 Mar 2021 11:37:14 ZRPC big dealJames MeeA market overview

    In past months I've been asked to join various sessions to discuss experiences and trends in the market.  As we near the end of Q1 2021, 12 months or so after Covid-19 really impacted so many in the UK, I have decided to share some personal reflections on the ups and downs of the deals market these past 12 months, and comment on its current features. 

    No-one will be surprised that transactions across the City took a dip in the early part of last year, but activity levels in different sectors continued to be strong – we saw over 20 projects in the insurance market alone last year

    This was especially the case in with lower-mid market intermediary deals.  The continuation surprised many, especially given the prevalence of private equity money involved, but the deals we were seeing involved real experts in the market who continued to see the business rationale in closing those transactions. They were also at a price point that continued to be manageable, despite the uncertainty and more challenging financing environment. A number were bolt-ons that were an important prelude to group sales that occurred later in the year/early this year.

    The market also saw a number of significant start-ups and scale-ups.  We were thrilled to work on the Beat Capital/Bain Capital Credit strategic partnership announced in the Autumn, and the Mosaic Syndicate start-up announced last month (backed by Golden Gate Capital). 

    There were of course a number of high profile processes that were in the market but which didn't close last year.  And there were others that were put on hold earlier in the year but which came back as sentiment and market conditions improved.

    Looking back, there was certainly a period of much uncertainty, with balance sheet exposures being very difficult to assess.  Diligence levels on intermediary deals also increased, with focus on underlying and sustainable earnings. 

    The legacy sector saw a number of successful investments by private equity funds, which underscored the attractiveness of legacy as a class.  The increasing attention being paid by live businesses to capital optimisation should lead to a continued run of legacy transactions for some time.  This past year we have seen a range of projects, including traditional RITCs, LPTs and Part VIIs, and if the start of 2021 is anything to go by, there will be a good number of such deals this year also. 

    Deal terms and dynamics - a snapshot of recent and current trends

    Diligence and decision making

    The resilience of target businesses (and indeed the resilience of their customers), quality of earnings, and their ability to meet financial covenants is always a feature of deals, but especially so this past twelve months. 

    We saw more commercial diligence being undertaken, quite some way down the value chain, seeking as best one ever can to minimise risks in this area.  From a legal perspective, working closely with other advisers undertaking commercial and financial due diligence has never been more important.

    Regulatory approvals

    Some deals have been taking longer with regulators under huge pressure, including from an operational perspective.  We are generally advising clients to assume that the full time period allowed to a regulator will be taken. 

    That said, on some recent deals, the regulatory approvals have come through very quickly – sometimes within days!

    Deal protections

    Deal terms always shift where purchasers are particularly cautious and financing market conditions are less favourable.  This past year has seen the introduction of deal techniques such as material adverse change clauses, price adjustment mechanisms to compensate for poor trading, and holdbacks, in much lower value deals than used often to be the case. 

    Early in the pandemic, some of the deal terms being asked for were a little 'silly season' – we saw drafting being sought in material adverse change clauses that might properly be described as giving the buyer an "option"! 

    As the year progressed, deal terms normalised.  In large part that is because the deals coming to market involved strong businesses and were not in any sense fire sales. 

    As any good deal doer knows, in order to keep deals on track, care and judgment is needed not to push too far in either direction – as absent any requirement to sell as a forced seller, non-stressed deals proceed most smoothly where all parties take a balanced view on contractual terms, values, and future prospects. 

    A buyer's market? 

    Was the insurance sector deals market ever a buyer's market last year?  We can only comment on our own experience, but with strong businesses involved, and competitive auctions for many, the terms obtainable on the sell side of the deals we were involved with were often strong.

    Buyers do continue to look to de-risk however, which makes sense as certain major economies head back into lockdowns, and vaccine rollouts in some countries are ahead of others.  So the deal protections and levels of diligence mentioned above are likely to be features of deals for some time to come.

     

    ]]>
    {02E1A00E-66A9-462B-95E5-FB77CE4CBE47}https://www.rpc.co.uk/perspectives/rpc-big-deal/fca-guidance-on-cancellations-and-refunds/FCA guidance on cancellations and refundsMon, 15 Mar 2021 14:03:00 ZRPC big dealWhitney SimpsonThe FCA released a Guidance Consultation – Cancellations and refunds: helping consumers with rights and routes to refunds on 12 February 2021. This guidance is relevant to credit card and debit card issuers and insurance providers as well as consumer groups and its aim is to reduce potential consumer inconvenience and frustration while increasing consumer understanding. The FCA's guidance consultation seeks to extend this temporary guidance to take account of the continued disruption caused by COVID-19.  

    The temporary guidance was introduced to address the complexities and delays consumers experienced in getting pay-outs from both card providers and insurance providers, and confusion in communications created by some insurance providers for not explaining adequately why consumers were being asked to contact their card providers before making an insurance claim. The FCA as part of this consultation is proposing that this guidance is to remain in force to account for ongoing uncertainty and the impact of further cancellations this year.

    Consumers faced with a cancellation often find it hard to identify the best route to a refund and usually must decide between making an insurance claim or a section 75 claim.  A section 75 claim is a claim that can be made against your credit card provider (who is jointly and severally responsible) for breach of contract or misrepresentation by a retailer or supplier.  If a consumer is eligible for a section 75 claim with their credit card provider, this can often lead to a better outcome as insurance policies often have an excess and claim limits. However, there is potential for consumers to be inconvenienced and frustrated if their insurance provider asks them to check with their card provider before making an insurance claim, without explaining why they should do this and how it might lead to a better outcome. Additionally, a section 75 claim against a credit card provider might not always be possible.

    The guidance aims to protect consumers who might suffer frustration and inconvenience when trying to get a refund for cancelled travel arrangements or events.  It builds on the FCA's Principles for Business: Principle 1 (Integrity), 2 (Skill, care and diligence), 6 (Customer interests), 7 (Communications with clients) and ICOBS 8.1. 

    The FCA proposes that its extension of the temporary guidance will take effect from 2 April 2021 and is intended to remain in place during the exceptional circumstances arising out of Covid-19 until varied or revoked.

    Insurance providers

    The FCA expects insurance firms to treat their customers fairly and consider what is in the consumers' interest.  Insurers should take reasonable steps to minimise the possibility they refer customers to card providers where it isn't in the customer's best interest.  It is suggested that where appropriate, insurance providers could ask questions to clarify whether there may or may not be a basis for a section 75 claim.  Where there is no basis for a section 75 claim, insurance providers should not ask the customer to pursue a claim with its credit card provider. 

    Where it is appropriate for a consumer to be referred to their credit card provider, insurers should take reasonable steps to ensure consumers understand why they are being referred e.g. outlining information on what section 75 covers. Insurers may also consider entering into arrangements with card providers to reduce the likelihood of instances where consumers are being passed between card providers and insurance providers. In complying with this guidance, insurance firms should ensure that they do not stray into the activity of 'advising' on the section 75 claim, where they may not have the appropriate regulatory permissions.

    Credit and debit card providers

    It is the FCA's expectation that section 75 (only applicable to credit cards) and chargeback claims (a mechanism for the card provider to recover money from the retailer/suppliers bank) should be handled in a reasonable timescale and the reason for any delays in processing claims should be explained to the customer. If the section 75 or chargeback claim is declined, the reasons for this should be explained to the customer clearly and fairly and further options should be laid out.  This might include checking to see whether the claim is covered by an insurance policy. 

    What next?

    The consultation closed on 26 February 2021. The FCA will consider feedback on the Guidance Consultation and will publish Final Guidance, depending on the feedback received. 

    For full details click here. 

    ]]>
    {CE2DE3FB-5EAE-49EE-AEEA-672065AE38D0}https://www.rpc.co.uk/perspectives/rpc-big-deal/spring-budget-2021-spend-now-tax-later/Spring Budget 2021 – spend now, tax later?Thu, 11 Mar 2021 12:29:50 ZRPC big dealBen RobertsThis blog focuses on some of the key business tax measures announced.

    Another date for the diary is 23 March 2021 (so-called "Tax Day"). It is expected that a number of tax consultations will be published by the Government on Tax Day, which are likely to give further insight as to the Government's longer-term tax policy plans. In particular, there is speculation that further detail may be provided as to thinking on planned changes to – and potential increases in rates of – CGT. 

    1. Corporation tax rate and DPT

    From 1 April 2023, the rate of UK corporation tax will be raised from 19% to 25%. From that date the current 19% rate will remain for profits below £50,000. Profits between £50,000 - £250,000 will be eligible for marginal relief, so that the rate of tax applicable to profits within this range will gradually increase up to the new 25% headline rate.

    This was perhaps a larger than expected increase, and reverses a long-trend of downwards corporation tax rate changes. As the Chancellor emphasised however, it will still leave the UK with a main rate of corporation tax lower than most of the G20 nations.

    As a result of this announcement, the diverted profits tax (DPT) rate will increase from 25% to 31% from 1 April 2023, so that the DPT rules continue to serve as an effective deterrent against diverting profits out of the UK (by maintaining the 6%  differential between DPT and the top rate of UK corporation tax).

    2. Super-deduction

    For the period 1 April 2021 – 31 March 2023, a 'super-deduction' will be available to companies that invest in qualifying new plant & machinery. As a result:

    investments in main rate assets (that usually attract 18% writing down allowances) in this period will attract a 130% super-deduction

    investments in assets qualifying for special rate relief (that usually attract 6% writing down allowances) will attract a 50% first-year allowance

    The super-deduction will allow companies investing in qualifying assets to cut their tax bill by up to 25p for every £1 they invest, during this period.

    3. Trading losses carry back

    The period for which businesses may carry back trading losses (to set against profits from earlier years) has been extended from one year to three years. This is a temporary measure for tax years 2020/21 and 2021/22.

    For companies, a maximum of £2,000,000 of unused trading losses will be eligible for this extension (after carry back to the preceding year – the amount available for carry back to the preceding year is uncapped) for accounting periods ending between 1 April 2020 and 31 March 2021. A separate £2,000,000 maximum will apply to accounting periods ending between 1 April 2021 and 31 March 2022.

    For unincorporated businesses, this extension will apply to a maximum of £2,000,000 of unused trading losses.

    4. UK withholding taxes on interest and royalty payments

    UK legislation giving effect to the EU Interest and Royalties Directive will be repealed. Under current UK law, there is an exemption from UK withholding taxes on intra-group interest and royalty payments made by a UK company to an EU company. 

    From 1 June 2021, UK withholding taxes will apply to payments of UK-source interest and royalties to EU member state companies (subject to the provisions of any relevant double tax treaty, which may reduce or even eliminate the UK withholding taxes due). 

    The reason for this change, of course, is that following the end of the Brexit transition period EU companies should not be treated more favourably than non-EU companies when in receipt of UK-source interest and royalty payments.

    5. VAT – reduced rate for hospitality and tourism

    The reduced rate of VAT (5%) for certain supplies of hospitality, hotel and holiday accommodation, and attractions has been extended again to 30 September 2021. 

    Originally this reduced 5% VAT rate was intended to revert to 20% from 12 January 2021 (it was then further extended to run to 31 March 2021). 

    Following last week's announcement the 5%  VAT rate will now taper from 5% to 12.5% on 1 October 2021, before reverting back to 20% after 31 March 2022.

    6. EMI schemes – call for evidence

    A call for evidence has been published as to whether (and, if so, how) to widen the existing tax-favourable Enterprise Management Incentives (EMI) share option scheme. The current EMI scheme offers significant tax benefits for both qualifying employees and employers, and is  designed for smaller, high-growth companies.

    7. SDLT

    The temporary increase in the stamp duty land tax (SDLT) nil-rate band for purchases of English and Northern Irish residential property will remain at £500,000 until 30 June 2021 (the nil-rate band had been due to revert to £125,000 on 1 April 2021). From 1 July 2021 – 30 September 2021, the nil-rate band will be £250,000.

    It was also confirmed that a 2% SDLT surcharge would apply on top of existing residential SDLT rates for non-resident purchasers of English and Northern Irish residential property, from 1 April 2021.

    The Chancellor also announced a raft of 'freezes' to certain personal tax allowances, thresholds and exempt amounts. Together with the announced increase in the UK corporation tax rate, these 'real terms' tax rises will mean that (according to the Government's published calculations) by 2025-26 there will be an extra yield for the UK economy of c.£28bn a year. It is hoped that this will go some way towards paying for the huge cost of the measures announced last week (£59bn), when added to other pandemic-related measures announced over the last 12 months.

    To summarise, the take-away from the Chancellor's announcements is that it's very much a case of spend now, raise taxes later. 

     

    ]]>
    {36AE52CE-1E94-4405-B4CB-8EDFF9C5BB27}https://www.rpc.co.uk/perspectives/rpc-big-deal/uk-listing-review-wants-companies-to-stay-at-home/UK Listing Review wants companies to stay at homeThu, 04 Mar 2021 09:33:07 ZRPC big dealConnor Cahalane, Karen HendyThe UK Listing Review, led by Lord Hill, has published a report for HM Treasury setting out its recommendations to reform the UK's listing regime with the objective of closing the perceived gap between the London Stock Exchange and trading venues in the US and Asia.

    The review highlights that the FTSE UK indices are largely comprised of 'old economy' businesses and too few innovative companies. The recommendations are aimed at making it easier for technology and other high growth businesses to IPO and grow on the London Stock Exchange. They would also bring changes for existing listed companies, in particular in relation to secondary offers.

    We have set out below our ten key takeaways from the review.

    1. Wide-ranging review: Lord Hill's report looks at many aspects of the London listing regime and considers the need to simplify and speed up the process of listing in London, without reducing investor protections. It also recommends changes to make secondary offers more efficient and steps to improve retail investor involvement in corporate actions.

    2. Free float: The existing requirement for Main Market companies to have at least 25% of their shares in public hands is identified as one of the strongest deterrents to listing in London. The review recommends lowering the free float requirement to 15% and allowing the FCA to use other criteria to assess whether there will be sufficient liquidity.

    3. Standard segment overhaul: The review recommends rebranding and promoting the standard segment of the Main Market as a venue with flexible requirements suitable for all types of company. It suggests that investor groups should publish industry guidelines with specific criteria for index inclusion (e.g. FTSE 100), for example, key corporate governance protections, so that this is not only determined by whether a company is in the premium segment and standard list companies that meet these criteria would be eligible for index inclusion.

    4. Dual-class shares: One of the headline proposals is to allow companies with dual class share structures to list in the premium segment of the Main Market. The review recommends that dual class share structures should be subject to the following conditions:
      • a maximum duration of five years;
      • a maximum weighted voting ratio of 20:1;
      • holders of the B class shares must be individuals who are also directors of the company;
      • voting rights would be limited to blocking unwanted takeovers and ensuring they remained as a director;
      • limitations on the transfer of B class shares.

    5. Prospectus regime: The review proposes a fundamental overhaul of the UK's prospectus regime to reverse the trend of disclosure documents increasing in size but reducing in usefulness to investors. It suggests a distinction should be made between the level of disclosure required in listing particulars for admissions to listings, public offers and secondary offers, similar to the regime that was in place in the UK prior to the introduction of the EU's Prospectus Directive in 2005.

    6. Forward-looking information: Potential liability for companies and directors when providing forward looking information is identified as an area that should be addressed. For high growth companies, investors are particularly interested in their future plans and performance forecasts. The review recommends that legislation should be introduced to provide safeguards from liability for companies and directors where they can demonstrate that they have exercised due care, skill and diligence in preparing forward-looking information.

    7. Relaxed revenue earning track record for high growth companies: Under the current Listing Rules, scientific research-based companies are not subject to the eligibility requirement to demonstrate a revenue earning track record. The review recommends that this exemption should be extended to high growth innovative companies from other sectors, including technology and life sciences.

    8. SPACs: The Listing Rules require that trading in the shares of special purpose acquisition companies (SPACs) must be suspended when they announce an acquisition. The review recommends revising this rule to make London a more attractive listing venue for SPACs, in particular in light of the increased number of SPACs coming to the market recently and their ability to provide companies with an alternative route to listing than a traditional IPO.

    9. More efficient secondary offers: The review recognises that the UK capital markets performed well in enabling companies to raise £42.7 billion through LSE secondary issuances in 2020. However, onerous prospectus rules meant that only a small proportion of those offers were carried out as pre-emptive rights issues or enabled retail investors to participate. It recommends this is addressed by developing a new regime to enable retail investors to participate in secondary offers.

    10. Unconnected research rules: The review recommends that the FCA reconsider the rules introduced in 2018 to promote the availability of independent research. These rules, which in practice have led to companies briefing unconnected analysts separately from analysts connected to the underwriting syndicate, have not led to an increase in research coverage but have lengthened the public phase of IPOs, leading to increased execution risk.

    The next step will be for HM Treasury to consider which, if any, of the recommendations it wants to take forward into legislation. The recommendations relating to changes to the Listing Rules would also require consultation. The FCA has separately announced that, where appropriate, it will aim to publish a consultation paper by summer 2021 and, subject to feedback, it will seek to make any changes to the Listing Rules by late 2021.

    ]]>
    {8E18FF47-52F9-4E57-99D4-80772554AF20}https://www.rpc.co.uk/perspectives/rpc-big-deal/national-security-and-investment-bill-when-will-it-come-into-force/National Security and Investment Bill – when will it come into force?Wed, 17 Feb 2021 12:24:32 ZRPC big dealNeil BrownIt is now over three months since the government published the National Security and Investment Bill, draft legislation which is expected to bring a major change in the way in which UK M&A transactions (and more) can be carried out.  This is no longer an issue for the dim and distant future – people working on deals now need to consider whether the bill might come into force before those deals have completed.

    What is the National Security and Investment Bill?

    Our previous blog on this topic can be found here.  In short, the bill proposes to give the government wide ranging powers to intervene in transactions on national security grounds.  "National security" is not clearly defined, but what is clear is that the bill is about far more than just traditional military equipment, but is also concerned with infrastructure, modern technologies, government suppliers and more.

    Acquisitions of companies within scope of the "mandatory regime" will require mandatory notification to a newly formed government entity before they can be completed.  Notification of acquisitions of other companies will be voluntary – but given the lack of a clear definition of "national security" and the power of the government to unwind transactions for up to five years after completion, many people will want to seek pre-clearance to de-risk their deal.

    When will it come into force?

    Given that the bill was published on 11 November 2020, the key question for people currently working on deals is when will the bill come into force?  The bill is currently working its way through Parliament and has already been approved by the House of Commons.  It had its second reading in the House of Lords on 4 February 2021 and is scheduled to undergo committee stage examination on 2 March 2021.  Based on usual timetables, it could be expected to have had its third reading in the House of Lords within two to three weeks of that date.  Therefore, it is possible that the bill could have been approved by both Houses of Parliament, and be ready to be granted Royal Asset, before the end of March.

    However, a number of amendments have been proposed to the bill which if approved by the House of Lords would require the bill to be reconsidered by the House of Commons.  Further, once a bill is ready for Royal Assent there is no certainty as to when that will happen – often multiple bills are stored up and all receive Royal Assent on the same day. Finally, we don't yet know how long a gap there will be (if any) between the bill receiving Royal Assent and its commencement date.

    Therefore, it is difficult to be precise as to when the National Security and Investment Bill will come into force.  However, it is possible that it could be in force by as early as April.  Therefore, many transactions which are underway now may not be completed until after the bill has come into force, and may find themselves caught by its wide new powers.

     

    ]]>
    {261E28F5-A60C-4C38-8FAF-C4D4D915C4D3}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-2021-budget-and-m-and-a/The 2021 Budget and M&AThu, 11 Feb 2021 10:34:00 ZRPC big dealJames Mee, Ben RobertsGiven the ongoing COVID-19 pandemic and the unprecedented hit the national economy has suffered over the last 11 months, the Chancellor is facing pressures arguably never seen before now in peacetime Britain.

    It has to be hoped that (with the successful vaccine rollout gathering pace) the Chancellor's attentions may start to turn more towards the post-pandemic economy. Although, inevitably, his fiscal and tax policies may be largely shaped by the question: how do we fill the hole in the public finances caused by COVID-19?

    There is a sense of déjà vu.  As we wrote last year, there was much speculation heading into Rishi Sunak's first Budget on possible changes to (as it was then) entrepreneurs' relief. We saw owner managers racing to do deals ahead of the budget, and taking aggressive positions in negotiations about who should bear the costs of any change to tax rates.  And then, of course, market sentiment rapidly changed as the pandemic neared.  As deals became less certain, the positions sellers adopted often changed, as speed for some became everything.

    This year CGT is once again a hot topic, with suggestions of CGT rate increases giving rise to similar uncertainties for live and potential M&A deals.  We're incredibly busy across the insurance, financial services, technology, retail, consumer products and various other sectors. As was the case last year, the uncertainty around CGT has been far from helpful. The best advice remains what it was a year ago – given the uncertainty, move deals along as fast as is sensibly possible, to mitigate against any changes that may be announced as to rates of CGT.

    If a deal cannot be completed before 3 March, then buyers and sellers should look to conclude unconditional sale contracts by 5 April 2021 if CGT is a concern. It is hoped that any potential CGT changes announced by the Chancellor would only take effect for share disposals from 6 April 2021, at the earliest.

    Elsewhere, possible changes to the UK corporation tax rate (currently 19%) have been mooted.

    A note on CGT rates

    CGT is currently charged at 20% (for higher and additional rate taxpayers) on gains that are not "upper rate gains". A higher rate (currently 28%) applies to gains realised by those taxpayers on (i) gains related to residential property, and not qualifying for relief, and (ii) carried interest gains.

    As a result of changes announced in the 2020 Budget, a lower CGT rate (at 10%, on the first £1m of lifetime gains) applies to assets qualifying for Business Asset Disposal relief (BAD). This was previously known as entrepreneurs' relief.

    These current CGT rates compare favourably with current income tax rates (being 40% for higher rate taxpayers and 45% for additional rate taxpayers).

    In November 2020 the Office of Tax Simplification (OTS) published its first report on its CGT Review. One of a number of recommendations made by the OTS was for CGT rates to be "more closely aligned" to income tax rates.

    Any CGT rate changes announced in the 2021 Budget could take effect from one of 3 obvious potential dates:

    • Immediately, to disposals taking place on or after the date of the Budget announcement (ie from 4th March).
    • To disposals taking place from the beginning of the next tax year (6 April 2021)
    • To disposals taking place from the beginning of a subsequent tax year (e.g. 6 April 2022)

    It is to be hoped that the Government will further consult on any proposed changes to CGT rates, allowing affected taxpayers and industry bodies to comment on any proposals.

    Assuming that any changes to CGT would not have immediate effect, the worst-case position would be that eligible sellers would have just over a month from the Budget day to be able to access current CGT rates.

    ]]>
    {A801B7F6-5A57-41BF-BEB1-C4A04D2D6161}https://www.rpc.co.uk/perspectives/rpc-big-deal/time-for-public-companies-to-come-clean-new-uk-climate-related-disclosures-and-esg-guidance/Time for public companies to come clean: New UK climate-related disclosures and ESG guidanceWed, 03 Feb 2021 10:17:47 ZRPC big dealConnor Cahalane
    This blog looks at the new requirements, the FCA's ESG guidance, and the potential liability of directors for climate-related disclosures.

    Why has the FCA introduced the new disclosure requirements?

    In July 2019, the UK government published its Green Finance Strategy outlining plans to align the private sector financial system with the government's target of reaching net zero greenhouse gas emissions by 2050 through supporting investment in green and low carbon technologies, services and infrastructure.

    The transition to a low carbon economy will have far reaching implications for businesses and will introduce new risks as well as new opportunities. The FCA believes increased transparency of how listed companies are affected by climate-related factors will improve market efficiency and allow investors to allocate capital in a way that supports the transition to a greener economy.

    Which companies need to make climate-related disclosures?

    The new requirements of Listing Rule 9.8.6 apply to all companies on the Premium Segment of the Main Market of the London Stock Exchange for accounting periods beginning on or after 1 January 2021. This means that the first annual reports subject to the new rules will be published in spring 2022. However, several companies have already begun to voluntarily include in their annual reports climate-related disclosures which follow the TCFD recommendations.

    For now, companies on the Standard Segment, companies quoted on AIM and UK private companies are not required to include a compliance statement or related disclosures in their annual reports. However, in its Policy Statement on Listing Rule 9.8.6,  the FCA noted that the Department for Business, Energy & Industrial Strategy (BEIS) will consult in 2021 on climate-related disclosure obligations for certain UK registered companies, which may include private companies as well as companies on the Standard Segment and AIM.

    What are the TCFD Recommendations and Recommended Disclosures?

    The TCFD was set up in 2015 to identify the information needed by investors, lenders and insurance underwriters to assess the climate-related risks and opportunities faced by companies. In its final report in 2017, the task force set out the following 4 overarching recommendations and 11 recommended disclosures.

    RPC law climate ESG
    These recommendations provide a useful and widely accepted framework to enhance and structure climate-related disclosures and support decision making by investors, management and other stakeholders.

    What guidance is available to help companies draft these disclosures?

    The TCFD has published guidance to assist businesses in different sectors prepare relevant climate-related disclosures. The new Listing Rules references this guidance as being relevant to determining whether a company's disclosures are consistent with the TCFD's recommendations.

    The following guidance for drafting climate-related disclosures is available on the TCFD's website:

    • TCFD Guidance for all Sectors
    • TCFD Supplemental Guidance for the Financial Sector
    • TCFD Supplemental Guidance for the Non-Financial Sector
    • TCFD Technical Supplement
    • TCFD Guidance on Risk Management Integration and Disclosure
    • TCFD Guidance on Scenario Analysis for Non-Financial Companies
    The new Listing Rules advise companies that they should consider whether their disclosures provide sufficient detail to enable investors and other users to assess a company's exposure to, and approach to, addressing climate-related issues. The FCA also encourages companies to carry out their own assessment of the appropriate level of detail to be included and the new rules recognise that climate change will affect different companies in different ways depending on the nature, size and complexity of their business. Each company should take account of relevant factors, such as the level of exposure to climate-related risks and opportunities, and the scope and objectives of their climate-related strategy.

    Do these climate-related disclosures need to be included in the annual report?

    The new rules require Premium Segment companies to include a statement in their annual report on whether or not they have made disclosures (i.e. in the annual report or elsewhere) consistent with the TCFD recommendations. However, the FCA encourages companies to also include the underlying disclosures in their annual reports, as this is the approach recommended by the TCFD.

    If some or all of the relevant disclosures are set out a document other than the annual report (for example, a separate sustainability report), the company must include in its annual report a description of where the disclosures have been made and an explanation of why it has not included the disclosures in the annual report.

    Can companies choose not to include these disclosures?

    The FCA has adopted the new disclosure requirements on a "comply or explain" basis. If a company chooses not to make disclosures in line with all the TCFD recommendations, it must include a statement in its annual report setting out the recommendations for which it has not included disclosures, the reasons for not including these disclosures, details of any steps it is taking to make those disclosures in the future, and the timeframe within which it expects to be able to make those disclosures.

    The FCA believes a "comply or explain" regime is a proportionate approach while companies are building their capacity to monitor and plan for climate-related risks and opportunities. However, the FCA is already considering strengthening the compliance basis of the rule which could result in these disclosures becoming mandatory at a future date.

    Do climate-related disclosures need to be verified by an external advisor?

    The new rules do not require companies to have their climate-related disclosures, or their statements of compliance, confirmed by an external advisor. Companies may decide to obtain third party assurance on a voluntary basis, and this is likely to be the approach taken by many companies who do not have the internal resources to carry out a detailed analysis of the relevant climate related disclosures.

    The FCA has commented that it sees significant value in third-party assurance of listed companies' TCFD-aligned disclosures on a longer-term basis and it will work with BEIS, other government departments and the FRC to develop UK policy in this area.

    How do the new disclosure requirements affect companies planning to IPO on, or transfer to, the Premium Segment?

    New applicants for admission the Premium Segment, whether through an IPO or transfer from AIM or the Standard Segment, are required to have established procedures which enable the applicant to comply with the Listing Rules and the Disclosure Guidance and Transparency Rules on an ongoing basis, including the new requirements on climate-related disclosures.

    New FCA Technical Note providing guidance on ESG disclosures

    The FCA has published a new Technical Note to help listed companies assess their wider disclosure obligations in relation to climate change and other ESG matters under the Listing Rules, Disclosure Guidance and Transparency Rules, Market Abuse Regulation and the Prospectus Regulation.

    The FCA acknowledges that 'ESG' encompasses a broad set of topics and it does not seek to provide a fixed definition of ESG in the guidance note. Instead, the guidance note is intended to clarify that, when assessing existing disclosure obligations, companies should assess any ESG considerations which may be material to the business.

    Could climate-related or other ESG disclosures expose directors to additional liability?

    Potential liability for these disclosures may be a concern for companies and their directors, particularly as they may require companies to make forward-looking statements. For example, one of the TCFD's recommendations is to disclose the resilience of a company's business strategy in light of different possible climate-change scenarios.

    Before these new Listing Rules took effect, UK companies were already required make disclosures on risks and uncertainties relevant to the financial performance and prospects of the business. For example, certain companies must disclose material issues such as policies on environmental matters, employees, social, community and human rights. Similarly, the FRC's Guidance on the Strategic Report recommends that companies include in their annual reports details of the principal risks they face and how these might affect future prospects.

    Certain parts in the annual report already benefit from a safe harbour under section 463 Companies Act 2006. This provides that the directors can only be liable to the company, and not any other person, for the disclosures and statements required by law to be included in the directors' report, strategic report, directors' remuneration report and any separate corporate governance report. However, in its response to the FCA's consultation on Listing Rule 9.8.6, the Company Law Committee of the City of London Law Society noted that it is unclear if the section 463 safe harbour applies to the new climate-related disclosures. The FCA has responded that it may consider what, if any, additional legislative changes or guidance is appropriate when it looks at whether to make these requirements mandatory for all listed companies.

    Directors are not expected to have a crystal ball that provides a perfect forecast of the company's, or the planet's, future. But they are expected to take reasonable steps to ensure that climate-related and other ESG disclosures are not untrue or misleading. Irrespective of whether a safe harbour applies, when making disclosures which require the company to make assumptions and forward-looking statements, directors should ensure that the company has in place robust processes for assessing the relevant available data, including third party forecasts, and that they have a well documented record demonstrating a reasonable basis for making any statements about the potential climate-related risks and opportunities faced by the business.
     
    ]]>
    {55BE9D90-333A-4189-AD30-663F2D237897}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-brexit-deal-and-tax-what-did-we-end-up-with/The Brexit deal and tax – what did we end up with?Tue, 26 Jan 2021 16:16:39 ZRPC big dealBen RobertsThis blog looks at the key tax provisions in the EU-UK Trade and Cooperation Agreement (TCA). It also takes a broader look at some of the main UK tax implications of Brexit.

    The TCA was agreed on 24th December 2020 and means that the UK exited the post-Brexit transition period on 31st December 2020 with a 'deal'. This is the deal that will shape the trading relationship between the UK and its former EU partners with effect from 1 January 2021.

    The TCA is in force "provisionally" from 1 January, pending full ratification by the EU. In the UK, the TCA has been given effect by the European Union (Future Relationship) Act 2020, which received Royal Assent on 30 December 2020.

    Before looking at the tax provisions within the TCA – a quick recap as to how we got to this point:

    • The UK ceased to be an EU Member State on 31 January 2020
    • During the remainder of 2020, up to 31 December 2020, EU law continued to apply in the UK and the UK remained part of the EU Single Market and Customs Union
    • From 11pm on 31 December 2020, the transition period ended. EU law no longer applies to the UK

    TCA – key tax provisions

    The TCA itself does not contain a great deal of tax-related provisions, but the following are worth highlighting.

    Trade and customs duties

    The TCA provides, generally, for zero tariffs, customs duties and quotas on exports and imports of goods between the UK and the EU. There are however detailed 'rules of origin' requirements so that – in order to be eligible for free trade treatment – the goods must not originate in third countries.

    Social security

    The TCA also provides for the continuation of reciprocal social security arrangements between the UK and the EU. The agreement ensures that only one set of national social security rules (in the UK, the national insurance contributions regime) applies to an employee and their employer during periods when the employee might be performing duties outside of his or her 'home' state. The basic rule will remain that social security contributions will be required in the country in which the work is undertaken.

    In addition, the agreement also sets out the circumstances in which the UK and EU member states will take into account relevant contributions paid into each other’s social security systems when determining individuals' entitlement to pensions and other benefits.

    Tax level playing field

    Tax is just one of the areas in which, pursuant to the TCA, the UK and EU have committed not to seek a competitive edge over the other (a so-called 'level playing field'). This is aimed at countering "harmful" business tax regimes that may affect the location of business activities ie by imposing a significantly lower effective level of tax than those that generally apply in the UK or the EU.

    Avoidance, fraud and commitment to OECD's BEPS project

    There are provisions within the TCA to enable HMRC and their counterparts in EU member states to cooperate and exchange information relating to VAT and customs fraud.

    The UK and EU have also in the TCA affirmed their commitment to implementing the OECD's minimum standards against base erosion profit shifting (BEPS). This is an important aspect of the deal, as the EU's tax rules in this area often go beyond what is required under OECD guidelines.

    DAC6

    One very early (and largely unexpected) development linked to the agreement of the TCA was the UK's decision, effective from 31 December 2020, to depart from the EU's mandatory disclosure rules for certain cross-border arrangements (known as DAC6). These rules are designed to facilitate the reporting and sharing between EU tax authorities of instances of tax planning.

    As a result of the UK's decision, the effect of DAC6 in the UK has been significantly reduced. Effectively, DAC6 in the UK now only applies in respect of 'Hallmark D', which concerns automatic exchange of information and beneficial ownership, and (broadly) covers arrangements that involve attempts to conceal income or assets, or to obscure beneficial ownership.

    The UK has been able to do this as the TCA requires the UK to implement OECD tax standards (not EU ones). The UK intends to consult on, and implement, the OECD's mandatory disclosure rules (MDR). In other words, the UK is moving from the EU's rules on tax transparency (under DAC6) to the OECD's international rules (MDR). This suggests how the UK might diverge from EU rules, post-Brexit.

    Other Brexit tax implications

    Looking beyond the TCA, here are some of the main areas where the UK tax regime has been affected by the end of the transition period.

    Indirect taxes

    VAT and customs and excise duties in the UK have been based on EU law.

    During the Brexit transition period, the UK continued to be treated for most purposes as if it were still an EU member state, and the UK continued to apply existing VAT rules.

    Now that the transition period has ended, the UK government could (in theory) abolish VAT in the UK. Not surprisingly – given the significant revenue raised by VAT – the government has committed to retaining the tax. However the UK now has full flexibility to change the rates of VAT, to tinker with VAT exemptions, and generally to modify the VAT regime however it sees fit.

    As the UK is now a 'third country' for EU VAT purposes, cross-border transactions involving the UK and EU member states will need to be looked at closely. VAT charges and requirements to register for VAT in EU member states may arise where previously, they would not.

    On a positive note, it has been confirmed in HMRC guidance that input VAT incurred on costs linked to certain supplies of insurance and financial services can be recovered where such supplies are made to persons in the EU.

    Direct taxes

    Unlike VAT, direct taxes fall outside the competence of the EU. That said, during the UK's membership of the EU a number of UK tax rules were considered to be incompatible with EU law (in particular, the EU's "fundamental freedoms"), and were therefore amended.

    One such example of a change to UK tax law, required in order to comply with the EU freedom of movement of capital, was the abolition of the UK's 1.5% stamp duties charge in respect of clearance services and depositaries. The UK government has confirmed it has no plans to reintroduce these higher rate stamp duties charges, now that the transition period has ended.

    Only a relatively small number of direct tax EU Directives exist. Arguably the main EU Directives worth noting here, which have now ceased to apply in the UK, concern domestic withholding taxes:

    • Interest and Royalties Directive (IRD): under the IRD, interest and royalty payments between "associated" companies in different EU member states are exempted from withholding tax (source state taxation). From 1 January 2021, some EU countries may start to deduct tax from interest and royalty payments made into the UK. UK recipients of interest and royalty payments from EU companies should check the terms of the double tax treaty between the UK and the relevant EU member state, to see how much tax (if any) will be deducted from the payment. For interest/royalty payments from UK companies to EU companies, under current UK law, the effect of the IRD should be maintained (so no UK withholdings should be required).

       

    • Parent-Subsidiary Directive (PSD): under the PSD, withholding tax is prohibited on dividends paid by an EU member state company (subsidiary) to an "associated" company in another EU member state (parent). Again, from 1 January 2021, some EU countries may start to deduct tax from dividend payments made into the UK. UK recipients of dividend payments from EU companies should again check the terms of the double tax treaty between the UK and the relevant EU member state, to see how much tax (if any) will be deducted from the payment. For dividend payments from UK companies to EU companies, as the UK does not impose withholding taxes on dividend payments, the loss of the benefits of the PSD should have no impact.

    The fact the UK has an extensive double tax treaty network should alleviate some of these issues for payments out of the EU and into the UK, but it should be noted that not all treaties entirely eliminate withholding taxes on interest, royalty and dividend payments (and there is an associated administrative burden in claiming treaty relief).

    ]]>
    {2253DF29-512D-4738-B34F-A66A51A1B6A7}https://www.rpc.co.uk/perspectives/rpc-big-deal/japan-uk-free-trade-agreement-and-japan-inc-manda/Japan-UK free trade agreement and Japan Inc M&AMon, 23 Nov 2020 11:46:49 ZRPC big dealNigel CollinsBritish International Trade Secretary, Liz Truss said that the U.K. expects to secure "£15 billion pounds of additional trade" with Japan.

    Politically and commercially this is an important deal for the UK and strengthens our relationship with the world's third-largest economy. The agreement goes beyond the benefits of the existing Japan-EU trade agreement in areas like digital and data. It is also a crucial step towards the UK joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), one of the world's largest free trade areas covering 11 Pacific nations, including Japan and Australia and accounting for circa 13% of the global economy. Initial discussions have begun for the UK's accession to the CPTPP.

    The new deal has been largely welcomed by Japanese companies, although concern remains whether the UK will reach a free trade agreement with the EU by the end of the transition period. Historically, many Japanese companies expanded into Europe using the UK as its base, and without such a deal, Japanese-owned European businesses will be disrupted. 

    Japan's Foreign Minister, Toshimitsu Motegi, said, "It is of paramount importance that the supply chain between the United Kingdom and the European Union is maintained even after the UK's withdrawal from the EU…Japan has high hopes that an agreement is reached soon on the negotiations between the UK and the EU on their future partnership".

    The new deal removes tariffs on Japanese cars in stages to zero in 2026, which is the same as in the existing Japan-EU agreement, while the UK will immediately scrap tariffs on railway cars and auto parts. Japanese tariffs on British farm products are kept at the same level as under the agreement with the EU. Interestingly, rules on e-commerce and financial services are more ambitious than the Japan-EU agreement, including the prohibition on governments requesting businesses to disclose algorithms used in artificial intelligence technology and encryption data.

    However, there was a missed opportunity by not agreeing a policy around investment. This may simply have been down to each side being in a hurry to get this agreement in place prior to the end of the transition period. The UK has been a key place of investment by many Japanese corporates and a European gateway since the 1980s and this is expected to continue (see below). 

    As noted in Morita-Jaeger (2020), the UK Government could have shown a strong commitment to Japanese investment by including a comprehensive investment chapter encompassing investment protection and dispute settlement. Further investment liberalisation is no longer a contentious issue for the Japan-UK investment relationship since investment policy environments in both Japan and the UK are already quite liberal, and Japan and the EU agreed to negotiate a bilateral investment treaty but have not yet reached agreement. The UK could have taken a lead in this respect. 

    Japan has also just signed the massive Regional Comprehensive Economic Partnership (RECP) trading agreement with China and the 10 members of ASEAN on 15 November covering nearly a third of the global economy, closing out eight years of tough negotiations. 

    Japan is well placed with its new trading arrangements, and RCEP is being seen by some commentators as a driving force for a greater focus on relationships and opportunities across Asia. So, will this put a dampener on the role of Japan/Europe M&A as we move out of the pandemic? 

    Is Japan Inc ready?

    Japanese businesses are well placed to come out of the current Covid-19 crisis in good shape and with cash to spend on their much-needed expansion. It is well-known these days that Japan Inc has a declining birth rate, ageing population, flat domestic growth, low interest rates and a need to expand beyond its borders to offset the tough challenge of growing organically. It has also experienced a lower level of shareholder pressure over the years and these conditions have contributed to a swelling of cash reserves. US$4.8tn according to corporate filings. The need, appetite and cash are available. 

    In addition, there is, and has been for many years, a push by the Japanese Government and major banks to continue the expansion of Japanese business abroad. Europe, with its abundance of businesses, historic brands, new technology and a sophisticated M&A market is very likely to remain an attractive hunting ground for acquisition hungry Japanese companies. On the whole, Japan Inc is seen as a good acquirer in that there is little or no stripping of assets or repatriation of profits, rather an investment in building an ecosystem or industry. This will stand them in good stead as FDI restrictions are only going to become increasingly restrictive over time. 

    Investment opportunities in Europe?

    During the pandemic many European businesses have taken on more debt to survive the terrible impact this disease has had on their businesses. For some, this will create a need for investment, partnering or sale of businesses. Others may fall into insolvency, although Japan Inc is generally not keen on acquiring a failing business and turning it around. Japan Inc will be looking for businesses that have weathered the pandemic well, even if they are now more highly leveraged. The weakness in the pound makes them an even more attractive target. 
    In the coming years we will also see more disposals by Japan Inc. This is a relatively new trend as they become more comfortable with disposing of non-core or underperforming businesses. Historically, they would hold on to businesses and prop them up with intra-group loans rather than closing them down or selling them off. This is an aspect of Japanese corporate culture that is changing, and we have advised on an increasing number of disposals over the last couple of years. The pandemic will have sharpened the focus and scrutiny on some of these businesses, and I understand from banking and legal contacts in Japan that the number of inquiries by Japan Inc thinking about disposing of businesses is on the increase. 

    Which sectors will be hot?

    Japan Inc's business interests are so wide that all sectors will experience activity from the manufacturing of bespoke widgets through the acquisition of heritage brands and investment in cutting edge new technology.

    Industrials still account for most of the current activity along with Healthcare, IT & Software and Consumer sectors. The need to decarbonise industry is another sector that is going to see a tremendous amount of activity by Japan Inc over the coming years. Japan is looking to position itself as a leader in the decarbonisation of industry. We can expect a flow of investment into green hydrogen, carbon capture, battery storage, fuel cells and other clean energy related projects across Europe. Both at the large-scale power plant level and investment into early stage new technology. 

    Japan Inc is very much set to play an important role in driving post Covid-19 M&A and Europe remains a very attractive location.

    ]]>
    {658E7D76-EDEE-4420-81C9-82D6519D05CC}https://www.rpc.co.uk/perspectives/rpc-big-deal/national-security-and-investment-bill-headline-points/National Security and Investment Bill – Headline PointsFri, 20 Nov 2020 11:58:00 ZRPC big dealNeil BrownThe government published the long anticipated National Security and Investment Bill:

    This will give the UK government much wider powers to intervene in transactions on national security grounds and is expected to come into force in Q1 or Q2 next year (depending on how long it takes for the bill to pass through Parliament).


    This is a big expansion in this area of law.  Going forward, when doing transactions, people are going to need to bear this legislation in mind – if only to confirm that it doesn't apply.

    Here are the initial headlines:

    1. It's very difficult to define what "national security" actually means.  Prior to the legislation coming into force there will be a process for informal discussion with the Department for Business and Energy, so that might be an important way of getting clarity for transactions currently in process.

    2. There are 17 sectors for which notification to the government is mandatory prior to completing a transaction.  This is about much more than just traditional military equipment, and captures sectors such as transport, energy, data infrastructure, communications and AI.

    3. Even if a transaction does not fall within a mandatory notification, the government still has the power to "call in" a transaction which meets the "trigger event" threshold for up to 5 years after it has completed.  So the "trigger event" threshold (which turns on control of entities and assets as mentioned below) becomes the key test. 

    4. Whether a trigger event occurs depends on "control", not "ownership".  Control can mean shareholdings as low as 15% or negative control of voting rights.

    5. Trigger events can occur when somebody takes control of "assets" as well as "entities" – so the legislation may capture transactions beyond just M&A (e.g. control of assets through an outsourcing arrangement).

    6. If the trigger event threshold is met, given the inherent uncertainty over what national security means, parties may want to make a voluntary notification pre-completion to avoid the risk of a deal being unwound post-completion.

    7. There are big penalties for breaching the new rules.  A criminal offence of up to 5 years imprisonment (including for directors of companies involved) and also fines of up to 5% of global turnover or £10m (whichever is higher)
    ]]>
    {106C3B62-779D-4CE1-A2DC-BFF73DD5C9C9}https://www.rpc.co.uk/perspectives/rpc-big-deal/a-guide-to-buying-and-selling-english-residential-property/A guide to buying and selling English residential propertyMon, 16 Nov 2020 14:40:46 ZRPC big dealOverview

    There is much to think about when buying, holding, and selling English residential property. Our real estate, tax and finance specialists can help guide you through the process using their vast experience and understanding of the current property market, as well as their legal expertise. High-value residential property often calls for multi-disciplinary advice.

    Whether acting for individuals in respect of family homes or investment properties, or corporate entities looking to obtain a revenue stream from residential property, our experts work hard to help clients maximise the property’s potential, providing funding and tax advice on the most efficient current holding structures.

    Our real estate lawyers will guide you through the steps required to purchase, finance or sell a high-value residential property. This may be off-plan, in a new development, leasehold, freehold or a combination of these and there are different considerations for each. Where relevant, we utilise planning, construction, enfranchisement, environmental and other expertise to deliver complete solutions.

    The English residential property market has experienced something of a mini-boom since the initial COVID-19 lockdowns were eased, fuelled in part by pent up demand, stamp duty land tax cuts and a desire for bigger, leafier properties. International buyers in particular are very active. The pound has experienced volatility, its fortunes tied closely to the Brexit negotiations. If there is no trade deal, many expect a slump, making UK property cheaper and potentially even more attractive for foreign investors.

    Our real estate lawyers have helped clients acquire and sell some of the most prestigious properties in London in 2020. We are noted in the leading legal directories for our responsive client service and pragmatic and commercial advice.

    Our tax specialists can help you identify the most tax-efficient structure for buying and holding English residential property (including advising on the tax treatment of “de-enveloping” residential property held in corporate structures). They will advise as to the availability of any applicable tax reliefs and keep you abreast of the latest UK tax changes affecting residential property.

    Our finance team work closely with a range of finance providers, including high street and international banks, real estate finance specialists and alternative funding providers. We are experienced in negotiating finance for residential property, including high-value properties and portfolios, and arranging appropriate security packages to meet funders’ requirements.

    The buying process

    Once a property has been selected, we will investigate the title by reviewing the deeds, carrying out searches and raising enquiries to identify any defects which may affect marketability or value. We will also assist with choosing a surveyor to report on the physical condition of the property. We will raise any necessary additional enquiries, working to resolve any issues that arise.

    We will provide a detailed report for you and any financers to consider, detailing our findings and highlighting any issues or points of note.

    Assuming that you wish to proceed with the purchase, all terms of commercial agreement will be captured in the purchase contract, any consents will be obtained, and we will move to exchange. It is at this point that a deposit of 10% is usually paid.

    Finally, any completion conditions are dealt with and the transfer of the property is signed by the parties. When the transfer is completed, the purchase monies will be sent to the seller and we will deal with the registration of the transfer at HM Land Registry and the payment of any property transaction tax.

     

    The selling process

    We can and do help clients from an early stage in preparing their property for the most advantageous sale. This can involve working closely with the agent on the marketing, managing a data room for a complex title and preparing the sales pack.

    The sales pack typically includes the title deeds, any management and insurance information, replies to enquiries and various forms detailing what will be included and excluded from the sale.
    Again, all terms of commercial agreement will be captured in the sale contract, any consents will be obtained, and we will move to exchange. It is at this point that a deposit of 10% is usually received.

    Finally, any completion conditions are dealt with and the transfer of the property is signed by the parties. When the transfer is completed, the purchase monies will be received from the seller.

    Tax

    There have been numerous changes to the UK tax rules affecting residential property over recent years. The result of these incremental changes is a tax regime that can appear quite confused. Our tax lawyers provide expert advice on the latest position regarding applicable taxes, any likely future developments, and the pros and cons of various structures, including with regard to:

    SDLT

    Stamp duty land tax (SDLT) is currently charged on non-rent consideration for purchases of English residential property at rates of up to 15%. A number of important considerations determine the applicable SDLT rates and rules. These include:

    • whether the property is to be bought by an individual buyer, or by a corporate (or other “non-natural”) buyer

    • whether the buyer already owns, or is deemed to already to own, other property(ies)

    • whether more than one identifiable property is being bought at the same time. This can affect whether the purchase is (for SDLT purposes) treated as residential or non-residential (and therefore the applicable tax rates). It can also result in the availability of an SDLT relief for purchases of multiple residences.

    There is currently an SDLT “holiday” for residential property purchases. Until 31 March 2021, the SDLT threshold has been raised to £500,000. During this time no SDLT will be payable on purchases below this figure by individuals unless they already own a property that is not being replaced. Purchases of more valuable properties will attract a lower SDLT charge during this time.
    The “bad” news is that there is also due to be introduced, from April 2021, a further SDLT “surcharge” of 2% for non-resident buyers of English residential property.

    ATED

    Another tax measure designed to discourage the acquisition of UK residential property through companies and other vehicles, the annual tax on enveloped dwellings (ATED) applies to residential property valued at over £500,000. The amount of ATED payable per year depends on the value of the property but (currently) ranges from £3,700 to £236,250, for properties valued at over £20m. Various ATED reliefs are available, where the property is being acquired for genuine commercial purposes. Our tax experts can advise on the detailed conditions attached to such reliefs.

    CGT

    Disposals of UK residential property, by UK residents and non-UK residents alike, will be subject to UK capital gains tax (CGT) to the extent a gain is realised. The main exemption, or relief, is known as the private residence relief (PRR) and is available to fully, or partially, exempt from tax gains arising on sales of main residences.

    IHT

    Inheritance tax (IHT), as well as being a charge levied upon an individual's estate on death, also arises on certain lifetime gifts. Further, ongoing IHT charges can also arise under rules applicable to certain types of trust. In contrast to other UK taxes, the territorial scope of IHT depends upon an individual's domicile status. Whilst a UK-domiciled individual will be subject to IHT on their worldwide estate, a non-domiciled individual will be subject to IHT only on their UK estate. Foreign owners of UK residential property are therefore brought within the scope of IHT, but only in respect of their UK property.

    For many years it was advantageous from an IHT perspective for a non-domiciled person to hold UK residential property through a non-UK company. Various changes to the UK tax rules applicable to residential property have all but removed this one-time advantage. Again, our tax experts can fully explain these complex rules and the pros and cons of different structures. Our tax experts can advise on the IHT consequences of acquiring UK residential property, whether any nil-rate bands, allowances, exemptions or reliefs might apply, and whether any IHT-efficient structures may be suitable.

    Income tax

    Any income from rental of UK residential property is subject to UK tax. Special rules apply where the landlord is non-UK resident, which may require the landlord to apply to HMRC for approval to have the rental income paid to it without deduction of UK tax. Our tax experts can also assist in the filing of any necessary UK tax returns in connection with residential property.

    Funding

    Where external funding is used to acquire/re-finance a property, we can assist in negotiating the commercial terms of the funding, and in drafting any relevant loan documentation. Our finance specialists will advise on the terms of the loan, any security required over the property or other assets, and any ranking agreements required between lenders.
    We will also assist with the preparation of the deliverables required by the funder as conditions to the loan, co-ordinating the creation and delivery of the relevant documents to enable funds to flow on time.

    Ownership

    Many UK property investors wish to keep their identity confidential. As HM Land Registry is open to the public, it has been common for investors to acquire their residential property through an offshore company, often with the shares held within a trust structure. For many years this carried with it the added benefit of favourable UK tax treatment (though see Tax above).

    From 2021, however, offshore companies and other vehicles holding UK residential property may be required to disclose their beneficial owners (the person(s) who ultimately owns, controls and benefits from an asset) on a public register.

    Recent transactions

    High-value residential family property – value: circa £30m

    We acted for a high net worth, international investor purchasing a large residential property in Central London as a main residence for his family and as a long-term investment for his young children. To add to the complexity, the property was part way through a multi-million-pound refurbishment. We considered a number of potential acquisition and holding structures and worked with the client to select the most tax-efficient (both in the short and long-term, and bearing in mind recent and proposed changes to the tax treatment of UK properties acquired by non-residents) whilst ensuring that the chosen structure was fit-for-purpose, given the client's intended plans for the property.

    High-value residential property – value: circa £34m

    Acting for the Hasib Holding Company Establishment in the acquisition and development of a high value residential property in Palace Green, London which involved extensive negotiations with The Crown Estate, dealing with the professional team during the construction phase and implementing a circa £34m development finance facility with Europe Arab Bank.

     

     

    ]]>
    {D771A0C1-EB22-4D70-B48E-30FCD5F01204}https://www.rpc.co.uk/perspectives/rpc-big-deal/10-tips-for-preparing-a-section-172-statement/10 tips for preparing a Section 172 StatementMon, 02 Nov 2020 10:39:51 ZRPC big dealEmily McGregorSection 172 imposes a general duty on directors to act in a way that he/she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard (amongst other matters) to:

    • the likely consequences of any decision in the long term;
    • the interests of the company's employees;
    • the need to foster the company's business relationships with suppliers, customers and others;
    • the impact of the company's operations on the community and the environment;
    • the desirability of the company maintaining a reputation for high standards of business conduct; and
    • the need to act fairly as between members of the company.

    Section 172 is not a new addition to the Companies Act 2006 and directors are well accustomed to considering the factors therein as a matter of course in their decision making.  However, the introduction of a specific requirement to report on exactly how the directors have had regard to those factors is novel and requires careful consideration and preparation by companies caught by the reporting regime.  This blog contains 10 practical tips for those companies to consider when tackling the preparation of a section 172 statement. 

    Preparation

    1. Read the guidance: BEIS, ICSA and the FRC have produced various detailed guidance notes which are a helpful starting point in understanding regulator and investor expectations. 

    2. Identify all group companies subject to the requirements: The requirement to produce a section 172 statement applies to any "large private company" incorporated in the UK which meets two or more of the following criteria:

    a. turnover of more than £36m;

    b. balance sheet total of more than £18m; or

    c. more than 250 employees.

    The requirement applies to all such large private companies, including subsidiaries (there may therefore be multiple companies within a group required to prepare their own individual section 172 statements). 

    3. Start early: During the course of the year, identify and make note of the key board decisions that are of enough strategic importance to the company to warrant being included in the section 172 statement – this will be easier than compiling the information at the end of the year.  When preparing board papers, consider including notes to discuss relevant stakeholder interests and factors under section 172 – this will help to guide the board discussion and provide evidence of compliance.  Consider putting in place training, policies and processes to support the company's strategy in light of the section 172 duty.  

    Content

    4. Include more than just a statement of compliance:  A simple statement of compliance is unlikely to be sufficient. Guidance states that the section 172 statement should include details of:

    a. the issues, factors and stakeholders the directors consider relevant in complying with the section 172 factors, and how they have formed that opinion;

    b. the methods used to engage with stakeholders and understand the issues to which the directors must have regard; and

    c. the effect of that regard on the company’s decisions and strategies during the year.

    5. Avoid a box-ticking exercise: Avoid taking a purely checklist approach to the section 172 factors. The statement should: 

    a. identify the significant decisions taken during the year; 

    b. meaningfully explain how the key stakeholders affected by such decisions have been identified and engaged;  

    c. reflect on how the significant decisions were made in light of such engagement and the relevant section 172 factors, and how any conflicts have been balanced (including difficulties as well as positives); and 

    d. address the implications of feedback received from stakeholder engagement and set out any future actions that are planned as a result. 

    6. Use an appropriate level of detail: Companies can use their discretion to judge what level of detail is appropriate in light of the size and complexity of the business (provided that the statement is meaningful and informative for shareholders).  Avoid the temptation to include lots of information about a matter specified in section 172 if it has limited relevance to the particular decision being discussed.  

    Presentation

    7. Publish in the correct place: The section 172 statement must be a separately identifiable statement within the strategic report of the company's annual report and accounts. The statement must be published on the company's website, either as a standalone statement or by publishing the entire strategic report or annual report. 

    8. Make it user-friendly: There is no set format or structure for a section 172 statement, however it should be as concise and user-friendly as possible and be consistent with the rest of the annual report. 

    9. Use cross-references: It may be helpful to include cross-references to detail included elsewhere in the annual report to avoid unnecessary repetition.  A subsidiary company may also cross-refer to a parent company’s explanation of the group's policies and procedures, provided it is contained in an accessible report and the subsidiary explains how its directors have applied or reflected the policies or decisions taken at group level.

    Other reporting requirements

    10. Consider any other applicable reporting requirements: Consider whether any additional reporting requirements apply – for example, UK incorporated companies with more than 250 UK employees must include a statement in the directors' report in the annual report summarising how the directors have engaged with employees and taken account of their interests. 

    ]]>
    {98757454-2444-4C5A-ABA4-97432E55A618}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-rule-of-dac6-are-you-ready/The rule of DAC6 - are you ready?Fri, 16 Oct 2020 10:43:50 +0100RPC big dealBen RobertsThis blog considers how 'DAC6'  might affect UK companies.

    A common misconception about DAC6 is that it only concerns "intermediaries" (law firms, accountants and other professional services providers). Responsibility for assessing, and reporting, transactions under DAC6 shifts to the UK company taxpayer in certain cases. It should therefore not be assumed that DAC6 affects only professional services firms and other advisors.

    It will be important for UK companies entering into cross-border arrangements to be aware of the rules and how they operate, given the reporting deadlines under DAC6 which are due to fall in early 2021. Significant penalties can be imposed for failures to report under DAC6 when required to do so.

    How does DAC6 work?

    The primary focus of DAC6 and the Regulations is to require "intermediaries" to review, monitor and, potentially, to report to HMRC certain arrangements which both (1) are "cross-border" in nature and (2) meet certain specified "hallmarks". 

    The first step, therefore, is to determine whether a transaction or other arrangement is "cross-border". For DAC6 purposes this means involving more than one EU member state, or an EU member state and a non-EU jurisdiction. The UK is considered a member state for these purposes, at least until the end of the Brexit transition period . In many cases whether or not an arrangement is cross-border should, hopefully, be obvious. However there is, currently, some ongoing debate / uncertainty in some cases as to whether an arrangement truly involves a particular jurisdiction. 

    Once it has been determined that a particular arrangement is "cross-border", the next step is to consider whether any of the 15 DAC6 hallmarks apply to that arrangement. The hallmarks range from those one might typically expect to find in tax motivated 'schemes' (such as fees being dependent upon a tax advantage being delivered) to certain cross-border transfers of assets with no tax avoidance motives. 

    The legislation is intended to identify potential tax-planning schemes.  However, as noted above arrangements without a tax avoidance motive can also be caught as not all of the hallmarks include the requirement that obtaining a tax advantage might reasonably be expected to be a main benefit of the arrangements

    What are the deadlines for reporting under DAC6?

    As noted above, DAC6 has already been implemented in the UK. It also has retrospective effect, in the sense that arrangements entered into from 25 June 2018 are potentially subject to review and to reporting.

    However, the first deadlines for reporting reportable cross-border arrangements have not yet passed. Initially set for first reporting by 31 July 2020, the various deadlines have been pushed back in the UK as a result of COVID-19 so that, at the time of writing:

    • arrangements where the first step was implemented between 25 June 2018 and 30 June 2020 must be reported to HMRC by 28 February 2021 
    • arrangements which trigger a reporting requirement between 1 July 2020 and 31 December 2020 must be reported to HMRC by 31 January 2021
    • arrangements which become reportable on or after 1 January 2021 must be reported within 30 days of the reporting requirement being triggered
    • where periodic reports are required in relation to marketable arrangements, the first such report must be made by 30 April 2021

    What does all this mean for UK companies?

    The primary burden of DAC6, in terms of determining whether any cross-border arrangement needs to be reported, and then actually making any report, falls on the "intermediary" (for example, the relevant law firm, accountancy firm or other professional advisor).

    This does not mean that any UK company that is not an "intermediary" should ignore DAC6. Here are some reasons why:

    1. one would expect that a company would want to at least know what transactions are being reported to HMRC by an "intermediary" that it has engaged. The terms of engagement for a number of intermediaries now include language recognising that the intermediary may have reporting requirements under DAC6. The company might reasonably expect to see a draft of any such report before it is made.
    2. if (1) there is no UK "intermediary" involved, or (2) where a UK law firm, as the only "intermediary", is prevented from itself making a DAC6 report to HMRC due to legal professional privilege (LPP), in either case it may fall on the UK company taxpayer (for example the law firm's client) to make any required report. In the case of such an intermediary prevented from reporting due to LPP, that intermediary would be required to notify the client of its obligations under DAC6.
    3. in terms of M&A, we are starting to see buyers of UK companies include a warranty that extends to DAC6 reporting requirements. Such a warranty typically includes a statement that the target company has not entered into any arrangements that would be reportable under DAC6. Even with published guidance that HMRC state to be 'final', there are still some significant uncertainties as to whether certain types of cross-border transactions are caught by DAC6. Agreeing to such a warranty may therefore be challenging for certain companies.
     
    ]]>
    {ADC030AC-F5F5-48B6-ACAB-9D5A3D09A43B}https://www.rpc.co.uk/perspectives/rpc-big-deal/future-funding-here-to-stay/Future Funding here to stay?Wed, 09 Sep 2020 10:52:33 +0100RPC big dealEdward ColvilleLatest figures for the British Business Bank (BBB)'s Future Fund, published on Monday (7 September 2020) show that the fund has now invested £642m in a total of 651 UK businesses.  The Future Fund, which was originally limited to £250m when it was launched in May, has continued to expand due to high demand.

    Designed to protect innovative UK start-ups from the impact of the Coronavirus pandemic, the Future Fund offers UK-based companies an investment of between £125,000 and £5 million by way of convertible loan notes, provided that the Future Fund's investment is at least matched by private investors.  The businesses backed by the Future Fund are seen as critical to sustaining UK growth and innovation, given their potential for rapid growth and job creation.  Although the BBB's investment starts as a loan, the debt can convert to equity on future funding rounds, listings etc, potentially leaving the BBB with shareholdings in hundreds of UK businesses.

    According to the latest figures, the largest sectors for Future Fund investments have been IT and communications, but around £100m has also been invested in financial and insurance businesses.  Many of these businesses have a tech or digital focus, although businesses in other sectors (including education and agriculture) have reported Future Fund investments.  Nearly 75% of the investments have been in businesses based in London and the South East, which remain home to the UK's largest technology hubs.

    The BBB's focus on innovative start-ups looks set to continue, as although the application window for Future Fund investments is due to close at the end of September, the Treasury and the Department for Business, Energy and Industrial Strategy, have launched a review of the role of the BBB, with a view to establishing a new national development or infrastructure bank to help UK businesses grow.  However, despite the success of the Future Fund, there has been some criticism of the BBB's continuing focus on start-ups in technology and related sectors, while many much larger businesses are still struggling to access funds from the Government's larger business interruption loan schemes.  The BBB is also responsible for over-seeing the range of Government-guaranteed loan schemes made available to UK businesses during the pandemic (the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Larger Business Interruption Loan Scheme), which together total more than £50 billion of loans.  

    Since the outset of the pandemic, large businesses (including retailers and airlines) and trade associations representing a broad range of sectors (e.g. retail, transport, hospitality and leisure) have been critical of their lack of access to the BBB's range of Government-backed schemes.  Where funding has been made available to UK businesses, it is typically by way of a bank loan through either BBLS or CBILS, leading to fears that the businesses borrowing these loans are simply pushing their cash flow issues down the line, with further restructurings and insolvencies likely in the months and years ahead as interest and repayment schedules kick in.  This is in contrast to the comparatively good deal offered on Future Fund investments, where in most cases the BBB's loan is expected to convert to equity as the business grows.  

    While the BBB's commitment to helping innovative start-ups is admirable, the support offered to larger businesses across the UK is likely to remain a key political issue for years to come.

    ]]>
    {BD9A5804-2BE0-4AA1-A628-BFE68CC9E211}https://www.rpc.co.uk/perspectives/rpc-big-deal/calculating-fair-value-is-it-really-fair/Calculating fair value – is it really fair?Tue, 04 Aug 2020 11:02:41 +0100RPC big dealChris BrierleyThe case arose as a result of Shanda Games Ltd (Shanda), a Cayman Islands company, merging with Capitalcorp Ltd, as part of a transaction to take Shanda back into private ownership and remove its listing on NASDAQ.

    Maso Capital Investments Ltd (Maso), a minority shareholder in Shanda, did not agree with the price offered for its shares in Shanda and objected to the merger in accordance with Cayman Islands company law. This law provides that an objecting shareholder is entitled to payment of the "fair value" of its shares. Where the company and the objecting shareholder are unable to agree what is a "fair value", the company can apply to the Grand Court in the Cayman Islands for a determination of the "fair value".

    The lack of certainty as to what is meant by the phrase "fair value" saw the dispute start in the Grand Court in the Cayman Islands, be considered by the Court of Appeal of the Cayman Islands, and end up in the Privy Council, the ultimate court of appeal for the Cayman Islands comprising five judges from the UK's Supreme Court.

    The Grand Court found that the correct interpretation of the concept of "fair value" was to value the shares on the basis of a pro rata share of the value of the whole of Shanda, with no minority discount. Shanda disagreed with this interpretation and so appealed to the Court of Appeal of the Cayman Islands, which ruled that, in fact, a minority discount should have been applied – a decision that was supported by the Privy Council.

    The reasons why the decisions were reached go beyond the scope of this article (and involved interpretation of statutory provisions and a comparative analysis of various other jurisdictions). But the effect of a differing interpretation of two words had a considerable impact on the amount to be paid. Based on the decision of the Grand Court, Maso's interest was valued at around US$73.5 million. Based on the decision of the Court of Appeal of the Cayman Islands (and supported by the Privy Council), Maso's interest was valued at around US$57 million - a US$16.5 million difference.

    Because this case looked at the meaning of "fair value" in the context of a statute, it was not open to the parties to agree in advance of any dispute what "fair value" should mean. This is, of course, not the same for private joint ventures or shareholders' agreements, or where management of a company hold shares in an employer – the concept of "fair value" can (and should) be defined in the relevant shareholders' agreement or articles of association. It is obviously better to set out what is meant by "fair value" at the outset rather than have a dispute about it later.

    What's fair?

    While Shanda Games Ltd v Maso Capital Investments Ltd looked at the meaning of the phrase "fair value" in the context of a Cayman Islands statute, it is a useful reminder that the different parties in a transaction can have very different expectations as to what a phrase means and how much the parties will be paid or have to pay where someone's shares are being bought for "fair value".

    To give some certainty to the parties, we would expect the relevant agreements to set out what should be considered when determining "fair value", whether that is agreed between the parties or referred to a third-party expert for determination where the parties cannot agree.

    Typical assumptions include:

    • that the sale is on arm's length terms between a willing seller and a willing buyer;
    • that the sale is of all the shares in the company;
    • that the company is a going concern (provided that it is a going concern at the date of determination);
    • the date on which the valuation is to be made;
    • disregarding whether the shares being valued represent a minority or majority interest or, alternatively, considering what value would be paid for the shares if there had been a sale of all of the shares and the proceeds had been allocated through the distribution 'waterfall' in the articles (i.e. where different share classes are entitled to different amounts of any sale proceeds); and
    • that the shares can be transferred without restriction and are not subject to any encumbrances.

    A costly (lack of) assumption

    The inclusion (or not) of a particular assumption can drastically alter the amount paid as "fair value", as was seen in the case of Doughty Hanson & Co Ltd v Roe decided by the High Court in England in 2007. Mr Roe left the private equity firm Doughty Hanson & Co Ltd and his departure was followed by a dispute as to the price to be paid for his shares, which (following his departure) had been determined by an accountancy firm acting as an expert.

    The articles of association set out various factors for the expert to consider in making its determination. Unfortunately for Mr Roe, the articles did not make any assumptions as to whether the company would continue as a going concern, with Mr Doughty and Mr Hanson continuing their involvement in the business. The consequence of this was that the expert took into account that Mr Doughty and Mr Hanson may leave the business, reducing its overall value – and, as a result, the expert valued Mr Roe's shares at value of £9.3 million. This contrasts with Mr Roe's assertion that his shares would be worth in the region of £100 million – a considerable difference, caused by the absence of a simple assumption.

    Lessons to be learned

    So the lessons are simple: first, if the opportunity arises, set out what you – and the other parties – mean when referring to a definition or phrase; and, second, think carefully about what falls within that definition.  The alternative, as we have seen above, can be costly.

    ]]>
    {827D3E93-22DA-449D-BBE6-664DFB3A04CA}https://www.rpc.co.uk/perspectives/rpc-big-deal/drafting-formulae-the-power-of-worked-examples/Drafting Formulae – the power of worked examplesMon, 27 Jul 2020 09:36:32 +0100RPC big dealNeil BrownThe recent decision in Altera Voyageur Production Limited v. Premier Oil E&P UK Ltd   highlights the power of using worked examples in contract drafting. One of my previous blogs discussed the issues which arose in the famous House of Lords case Chartbrook v. Persimmon in which the contract did not include a worked example and the court was left to interpret some very ambiguous narrative drafting.

    By contrast, in Altera Voyageur the contract contained both narrative drafting that set out the amount to be paid under the contract and also two worked examples – however the narrative drafting on the one hand and the two worked examples on the other hand were inconsistent, producing a difference in payment of close to US$16m.  

    The High Court gave priority to the two worked examples. It did so even though:

    • there was a clause which said that the main body of the contract (in which the narrative drafting was contained) took priority over the schedules (in which the worked examples were contained) – the court took the view that the worked examples provided a more detailed interpretation of the narrative clauses
    • the worked examples produced a result which was generally accepted as being commercially unreasonable
    •  the contract contained various drafting errors and redundancies which cast doubt on how much weight should be placed on any one provision (including the worked examples)

     It is a decision which appears to have turned on a knife-edge and could easily have been decided the other way.  As all contractual interpretation is highly fact specific it is difficult to draw out any general principle of worked examples taking priority over narrative drafting or a formula.  However, what the case does show is the crucial importance of worked examples and the power that they can have.

     In my earlier blog on Chartrook v. Persimmon one of my recommendations was to always include a worked example. What Altera Voyageur illustrates is the crucial importance of making sure that those worked examples are correct and are consistent with the operative provision of the contract that they are illustrating.

     
    ]]>
    {7E338437-75CA-4017-BAAB-7A15BFEBA93E}https://www.rpc.co.uk/perspectives/rpc-big-deal/wi-insurance-the-rise-of-synthetic-warranties/W&I Insurance: The rise of synthetic warranties?Warranty and indemnity (W&I) insurers are seeking innovative ways to service the M&A market in a Covid-19 pandemic induced downturn. This article discusses the potential uses for W&I insurance policies with synthetic aspects in meeting the market's current needs.]]>Wed, 22 Jul 2020 16:13:58 +0100RPC big dealJeremy CunninghamWhat are synthetic warranties?

    Synthetic warranties are standalone warranties negotiated outside of a sale and purchase agreement (whether on a business sale or a share sale) (SPA) between the insured and the insurer.  Synthetic warranties are insured on a "deemed" basis, as if they had been given by a seller to a buyer in the normal way. The insurer then covers any financial liability for a breach of the synthetic warranties.

    The synthetic concept is not new. On a smaller and more specific scale, insurers in the W&I market have been providing synthetic policy enhancements alongside their W&I insurance policies for many years. Synthetic policy enhancements have enabled W&I policies to bridge the gap between the protections a buyer is seeking under an SPA versus those which a seller is prepared to give (see "synthetic policy enhancements" below).

    The first fully synthetic W&I policy was placed in the UK in 2018. However, fully synthetic W&I policies have been limited and largely confined to transactions involving the acquisition of relatively simple businesses, such as the acquisition of property holding SPVs or asset rich businesses.

    How is a W&I policy with synthetic warranties different from conventional W&I Insurance?

    A traditional W&I policy sits behind the warranties given by a seller and negotiated with the buyer in the SPA. There is a negotiation exercise between the insured and insurer around the scope, limitations and the extent to which the warranties in the SPA are covered by the W&I insurance policy. However, this is normally limited with only a few warranties excluded from cover or where partial amendments to specific warranty wording is deemed made. The process of underwriting a W&I policy usually runs concurrently with the negotiation of the main transaction documents (including the negotiation of the warranties under the SPA). The W&I policy then binds at either exchange or completion.

    As a full set of synthetic warranties are anticipated for scenarios where there are limited or no warranties between the buyer and seller under the SPA the underwriting process requires a greater level of negotiation between the insured and the insurer to agree the synthetic warranty "package". The negotiations are undertaken in the same timeframe as the underlying transaction.  In practice, the overall time demand on an insured is similar to a typical transaction. The warranty negotiation has simply moved from the SPA between the buyer and seller to the W&I policy between the insured and the insurer.

    Under a traditional W&I policy the insured is expected to have undertaken a comprehensive legal, tax and financial due diligence exercise to provide the required level of comfort to the underwriting insurer. This would involve an exchange and flow of information and due diligence materials between the seller and the buyer through the usual due diligence Q&A and/or data room processes. Any perceived "gaps" in the due diligence can often lead the insurer to exclude certain warranties from cover. The limited number of fully synthetic W&I policies that have been placed have historically relied on the same, if not a higher standard, of due diligence to compensate for there being no buyer and seller warranty negotiation process.

    What are the different types of synthetic policies?

    The extent of the gap between the warranties a seller is willing to offer and the comfort a buyer is seeking will dictate whether either synthetic policy enhancements or a full set of synthetic warranties would be appropriate.

    Synthetic policy enhancements

    Where a buyer is seeking additional protection, an underwriter may (for an additional premium) agree to "synthetically" extend cover through the W&I policy beyond the wording or provisions of the SPA.  The range of typical synthetic policy enhancements includes:

    • knowledge scrape: which effectively removes the knowledge qualifiers in the warranties in the SPA;
    • materiality scrape: which effectively removes the materiality qualifiers in the warranties as drafted in the SPA;
    • basis of recovery: permitting any recovery made under the W&I policy to be made on an indemnity basis of damages; and
    • extension of limitation periods: extending the warranty limitation period beyond that set out in the SPA.

    Synthetic tax deeds are also becoming increasingly commonplace in the W&I market.  Like synthetic warranties, a synthetic tax deed provides cover when no tax deed is offered by the seller and negotiated separately between the insured and buyer.

    Fully synthetic warranties

    A set of fully synthetic warranties may be a possible solution where (i) the regulatory environment does not permit the seller or management to give warranties to the buyer directly; or (ii) the seller and/or management are not prepared or are not in a position to offer warranties and/or disclose against them. For example, in distressed sales or public to private transactions.

    What are the advantages of fully synthetic policies?

    A fully synthetic W&I policy may expedite the timeframe of a transaction. There will be no negotiation with the seller over the warranties and limitations and only one negotiation of the warranty coverage (between the insurer and the insured) rather than two. Seller's awareness is also no longer relevant in the negotiation process. A fully synthetic policy may also provide insurance coverage where it would not otherwise have been available to a buyer (as noted above).

    Advantages for a buyer would include:

    • a reduction in risk associated with the acquisition;
    • strategic differentiator at auction or in a competitive process; and
    • it enables the buyer to tailor its due diligence around the synthetic warranty coverage (thereby potentially saving cost).

    More specifically, if a buyer were able to take out a W&I policy incorporating a full set synthetic warranties this might be advantageous to a seller in:

    • widening the pool of potential buyers (e.g. by potential buyers being able to differentiate themselves in a competitive/auction sale); and
    • maximising the purchase price.

    Challenges

    The availability of a fully synthetic W&I policy will be determined by the extent to which there is (i) available and sufficiently comprehensive due diligence (tax, legal and financial); (ii) engagement with the seller/management; (iii) a reasonable timeframe; and (iv) a favourable sector/jurisdiction.

    A comprehensive due diligence exercise is still critical.  A synthetic warranty suite would closely reflect those areas where comprehensive due diligence has been completed on the target business.  This can be a challenge or severely limited in certain distressed sales or public to private transactions.   

    The disclosure process also remains a challenge for fully synthetic policies, with insurers still typically requiring some engagement from the seller or management in that process. Any impact on the quality of the due diligence and the disclosure process due to the lack of seller/management engagement is likely to have a knock-on impact on the scope of cover. Fully synthetic policies in any case often provide a narrower set of warranties than traditional (nil recourse) W&I policies and at a higher price. To date, market participants are also unfamiliar with synthetic warranty deeds.

    In the current market, a synthetic policy is also likely to be challenging in a competitive process due to the potential impact such a policy would have on timing. That is why to date fully synthetic policies in the distressed sale space have been limited to non-competitive situations and sales involving relatively straight forward businesses (e.g. not heavily regulated or multi-jurisdictional).  However, synthetic cover does provide an important tool in bridging the gap from seller to buyer and it remains to be seen how the market navigates these challenges to ensure wider application.

    ]]>
    {5C189705-B605-4280-B7FF-9323C2B658D4}https://www.rpc.co.uk/perspectives/rpc-big-deal/ma-how-due-diligence-is-being-changed-by-coronavirus/M&A - how due diligence is being changed by coronavirusMon, 13 Jul 2020 12:33:28 +0100RPC big dealJeremy CunninghamCommercial Leases and Real Estate Issues

    The UK Government policy of working from home as far as possible and until recently only re-opening some non-essential retail businesses (provided they observe social distancing measures) has had a drastically negative impact on many businesses, including bricks and mortar retail. A priority for many tenants has been to renegotiate their existing commercial leases.

    A practical consideration for many businesses across different sectors is how business performance has been impacted due to employees working from home (assuming non- essential workers). Businesses and sectors which involve providing services to clients on site at their premises have also been heavily impacted.

    Whilst a lot of the commercial (or financial) due diligence will need to focus on the financial impact of recent UK Government policy, more detailed legal due diligence enquiries on the target may focus on issues concerning:

    • The extent to which negotiations for rent holiday or rent deductions with landlord(s) have taken place;
    • Whether the target business has sought to invoke Force Majeure or the landlord has sought to terminate; and
    • The increased importance of health and safety and access issues.

    Insurance

    The uncertain economic outlook is likely to warrant putting the target business's insurance coverage under additional scrutiny, including in relation to business interruption, professional indemnity or product recall. The pressure on suppliers and third-party contractors caused by the current economic climate may also increase the risk of an insurance claim due to sub-standard performance.

    Employees

    Diligence will need to focus on to what extent the target has complied with Covid-19 related legislation regarding the health and safety of its workforce and UK Government policy, together with compliance around the target's own internal HR policy and procedures, including its work from home policy. To the extent the target business has been forced to furlough employees or effect a redundancy program, legal compliance and increased risk of employee claims will need to be taken into consideration. The long-term commercial impact on the business may also need to be considered.

    Understanding to what extent the target business has been receiving funding under the UK's Coronavirus Job Retention Scheme or any other government funding will also need to be properly investigated (and the impact on the business when such funding ends considered).

    Government Funding

    Understanding whether the target business is dependent on any other government funding or tax advantages (other than the Coronavirus Job Retention Scheme),  as a result of Covid-19 should also be considered.

    Working Capital and Finance

    Commercially it will be important to understand whether the target business has experienced liquidity pressure or faced increased working capital requirements. To what extent has it attempted to alleviate this pressure by re-negotiating its employment, supply chain or commercial lease arrangements, together with its approach to its own existing lending facilities and attempts to maximise these will be key diligence items.

    Due diligence will need to focus on any amendments to existing facilities and recent communications with lenders. Assessing a downturn in the target's business in relation to the terms of its existing facility agreements, including potentially triggering financial covenants, cross default, notification and material adverse change (MAC) provisions will be key.

    The solvency of the target will also need to be scrutinised from a financial due diligence perspective.

    Material contracts and Supply Chain

    Due to Covid-19's impact on businesses throughout the supply chain, there is an increased likelihood that the target business is in material breach of contracts with its customers or that its suppliers, agents, distributors, licencees or third party contractors have themselves committed a material breach. In light of Covid-19 commercial contract due diligence in addition to typical enquiries should focus on:

    • Whether there has been any re-negotiation of any customer or third-party contracts;
    • Whether any material terms have been waived (which might affect future enforcement);
    • Whether any contracting party has sought to invoke a MAC clause or Force Majeure clause or otherwise sought to terminate the contract;
    • How revenue is recognised under contract(s) and whether contractual arrangements can continue to be performed on a profitable basis; and
    • Any practical consequences from enforcement.

    Any potential strain on the supply chain caused by Covid-19 should be robustly tested.

    IT

    Understanding to what extent the IT systems of the target business have coped or have had to adapt because of Covid-19 (e.g. because of the workforce working remotely or reaching out to customers on line) and to what extent they can support the business going forward is likely to warrant greater attention.

     A heavier emphasis on IT support and disaster recovery systems is also likely.

    Management

    Consideration should also be given to the potential likelihood that since the outbreak of the pandemic, management may have potentially become distracted from other considerations  (e.g. day to day management of the business, corporate governance, data protection or anti-corruption issues).

    Financial

    Whilst this blog focuses on legal due diligence, any financial due diligence might also need a shift in focus. Historical financial information forming the basis of valuation multiples and future cash flow generation might have a perceived lesser relevance than forecasted information. The working capital required to make a previously (pre-Covid-19) profit generative business profitable again or to re-start the business after having been "moth-balled" is likely to take a lot of the financial focus.

    ]]>
    {16A49C31-A1CA-4959-AD6E-B3B8DB6313E0}https://www.rpc.co.uk/perspectives/rpc-big-deal/corporate-insolvency-and-governance-act-2020-whats-changed-for-companies/Corporate Insolvency and Governance Act 2020: What's changed for companies?Mon, 06 Jul 2020 09:44:35 +0100RPC big dealElla ShanksThe Act is designed to give companies the greater flexibility needed as a result of COVID-19.  This article focuses on the changes to the procedures for holding an Annual General Meeting (AGM) and to Companies House deadlines; but note the Act also implements measures relaxing the insolvency regime to give companies some breathing space during uncertain operating conditions.

    Shareholders' meetings

    Public companies are required to hold an AGM within six months of the end of their accounting period, and to file their accounts within the same timeframe, and private companies may also be required to hold AGMs by their articles of association (Articles). The Act seeks to relax requirements in light of the current challenges posed by restrictions on movement and gatherings.

    The changes to AGMs and other general meetings of shareholders apply retrospectively from 26 March 2020 until 30 September 2020 (the Relevant Period), although the Secretary of State will have the right to shorten the Relevant Period or extend it as far as 5 April 2021.

    During the Relevant Period, the following changes will apply and will override any contradicting provisions of a company's Articles:

    1. Any company that would normally be required to hold its AGM during the Relevant Period will now be entitled to hold it at any time before the end of the Relevant Period.As things currently stand, meetings will need to be held before 30 September 2020. However, please note that if the AGM has already been convened it cannot be postponed unless the Articles permit this.
    2. AGMs need not be held at any particular place (for example, as specified in a company's Articles).
    3. AGMs may be held, and votes may be cast, by electronic or other means.
    4. AGMs may be held without any number of those participating in the meeting being together at the same place.
    5. Shareholders will not have the right to attend an AGM in person, to participate in the meeting other than by voting, or to vote by any particular means.

    Now could be a good time for companies to review the existing provisions relating to general meetings in their Articles. For example, companies might consider aligning their AGM procedures better with modern technology after the Act ceases to apply.  In the wake of the COVID-19 pandemic, shareholders and boards alike may wish to switch permanently to holding "hybrid" AGMs which allow shareholders to join via electronic means rather than requiring physical presence.

    Guidance published by the Financial Reporting Council relating to AGMs during the COVID-19 pandemic can be found here.

    Companies House filing deadlines

    The Act also permits the Secretary of State to extend deadlines for certain filings – these are contained in regulations which also came into force on 27 June 2020. Companies House guidance published on 1 July 2020 gives clear guidance on the various relaxations, which include the following:

    1. Accounts

      Companies will be granted an automatic three-month extension to file their accounts if their filing deadline falls between 27 June 2020 and 5 April 2021.  The three-month extension will start from the company's original filing deadline, rather than any extension already granted.  Companies can view their new filing deadline using the Companies House service website.

    2. Confirmation statement

      Normally, companies are given 14 days from the end of their review period in which to file their confirmation statement.  Under the new Regulations, this is automatically extended to 42 days.

    3. Event-driven filings
      The period for delivery of forms notifying Companies House of changes such as to director details, PSC information and registered office address will increase to 42 days.  The period allowed to deliver the particulars of a charge will increase to 31 days for charges created on or after 6 June 2020.

    The usual Companies House telephone enquiries line is not in operation currently and all enquiries should be sent by email to enquiries@companieshouse.gov.uk. The same-day filing service is also suspended.

    Companies are encouraged to use the online filing service where possible given the paper processing service is slower than usual. Companies can register for Webfiling but should note that the Webfiling code will be sent to the registered office of the company. 

    ]]>
    {D44A60FB-7AF1-45CE-998F-58778F9B352F}https://www.rpc.co.uk/perspectives/rpc-big-deal/loan-covenant-disputes-likely-to-impact-almost-all-industry-sectors/Loan covenant disputes likely to impact almost all industry sectors unless lenders and investors work to find resolutionFri, 12 Jun 2020 09:37:00 +0100RPC big dealSukh AharkWe expect more loan covenant disputes, outside of the real estate sectors, to occur as the coronavirus crisis continues to hit revenues and profits at businesses. Breaches of covenants on loans were a major cause of disputes between banks and customers following the credit crunch in 2008-09.

    Background

    A loan covenant is a condition set by the lender which borrowers must not breach. They are designed to protect lenders from the deteriorating financial position of borrowers.

    Common financial covenants on loans which commercial borrowers must not breach include: cashflow coverage ratio, based on the borrowers’ projected next quarter results, and interest coverage ratio, which measures the borrower’s ability to pay interest on loans over a specific period. 

    As some of the most common financial covenants are based on forecasts of profits or turnover banks may already view many borrowers to be in breach of their covenants.

    If a borrower breaches a covenant, a lender can increase the interest rate on the loan (including a possible additional arrangement fee) to make up for the increased risk.

    In rarer circumstances, the lender can accelerate repayment of the loan in full, refuse to make any further advances of funds under the loan and exercise any rights under any securities granted in its favour.

    How should businesses approach the issue?

    It is likely that some businesses will resist any higher interest rates imposed by lenders by arguing that the exceptional circumstances caused by the coronavirus means they cannot afford to pay higher rates on loans. 

    In addition, they will argue that some breaches are purely technical in nature and if not for the occurrence of the coronavirus their underlying business would still be viable and strong. Disputes may also focus on additional restrictions the lenders may also try to impose on the borrower in return for retaining the loan.

    Disputes between borrowers and lenders soared after the financial crisis. This time around there is a real desire to work together to avoid the pitfalls of the last financial crisis. However, some disputes will be unavoidable as banks have to protect their shareholders’ interests.

    If you feel your business is reaching the limits of your covenants with your bank then you should approach them as soon as possible especially if there is a syndicate of banks involved. It’s easier to negotiate with your bank when the covenant test dates are still in the future.

     

    ]]>
    {31E7D430-45B4-4C36-8BBF-1EC01BB6AFE5}https://www.rpc.co.uk/perspectives/rpc-big-deal/insurance-special-purpose-vehicles-the-wheels-of-change-in-motioninsurance-special-purpose-vehicles/Insurance special purpose vehicles - the wheels of change in motionMon, 01 Jun 2020 10:23:44 +0100RPC big dealLauren MurphyThese updates are a result of the PRA's experience gained since the launch of the UK Insurance Linked Securities (ILS) Regime in December 2017, which is the corporate, tax and regulatory framework for UK domiciled ISPVs which sponsors and arrangers can use in ILS or CRe transactions. The PRA stated that it wished to refine the framework to facilitate the issuance of ILS through ISPVs in the UK by taking into account the insight gained.

    These updates (a number of which are detailed below) are designed to reflect the logistics of ILS transactions and the authorisation process, and to clarify the PRA's expectations in this regard:

    Documentation requirements

    • the ‘documentation requirements’ section of the SS8/17 ‘Authorisation and supervision of insurance special purpose vehicles’ (SS) (which is a flexible framework for firms, incorporating the PRA's new and existing expectations in relation to the authorisation and supervision of ISPVs, designed to help firms understand whether they are meeting these expectations)has been amended to clarify the PRA’s expectations regarding;
    • the documentation that is required to be submitted at the point of application for authorisation of an ISPV – the PRA has clarified that it recognises that all the final documentation might not be available for submission at the time an applicant wishes to apply. The PRA will take a pragmatic approach, and when an applicant identifies that this may be the case it expects the applicant to engage with the PRA, explain what information is likely to be available and how this may affect the application; 
    • where certain outstanding commercial terms may only be finalised post PRA approval – the PRA has clarified that it understands that in ‘live’ transactions, some of the transaction documents may not be legally executed prior to obtaining PRA authorisation, and that certain commercial terms may remain outstanding until execution. The PRA is adopting a proportionate response whereby the applicants may submit the final documentation post authorisation, upon execution; and
    • independent third party opinions to support an application (particularly, legal opinions) – the PRA has clarified: (i) that it does not generally expect to request such opinions in all cases; (ii) the circumstances in which the PRA believes such third party opinions may be helpful to support an application; and (iii) the circumstances in which the PRA would expect an applicant to provide such opinions

    Funding arrangements

    • additional details in the ‘funding arrangements’ section of the SS have been added to provide examples of where there may be changes to the risk transferred (being some or all of the risk under a contract of insurance) and/or funding of the ISPV
    • clarity has been provided regarding market participants being able to structure mechanisms under the UK ILS regime which include provisions to ‘roll-over’ funding, while meeting the fully funded requirement

    Risk transfer requirements

    • chapter 3 of the SS has been amended to clarify the PRA’s expectations with regards to risk transfers. Those expectations address the number and type of risk transfer arrangements an ISPV may assume, the specific requirements that must be complied with, and the information that must be provided to demonstrate compliance

    MISPV New Risk Assumption Notification Form

    • the PRA has amended the MISPV New Risk Assumption Notification to limit duplication with regards to information that has been provided at the initial application stage
    ]]>
    {97D9F4FD-BE32-4A48-A083-1051DF28F58E}https://www.rpc.co.uk/perspectives/rpc-big-deal/football-referees-held-not-to-be-employed-for-tax-purposes-the-final-whistle-for-hmrc/Football referees held not to be employed for tax purposes – the final whistle for HMRC? Thu, 14 May 2020 11:45:13 +0100RPC big dealBen RobertsThis blog considers the recent Upper Tribunal (UT) decision in Professional Game Match Officials Limited v HMRC [2020] UKUT 147 (TCC), a decision that brought together (to my personal delight) football and tax.

    The UT dismissed HMRC's appeal against a 2018 decision of the First-tier Tribunal (FTT) that certain football referees and other match day officials were not employees of Professional Game Match Officials Limited (PGMOL). Accordingly, PGMOL did not have tax and national insurance contributions liabilities in respect of the officials in question.

    The football season may be paused (or, in some cases, already declared 'null and void') but this decision has given us a little bit of a tax-related football fix. The decision helpfully summarises the case law on mutuality of obligation although, as this decision amply demonstrates, whether an individual is, or is not, an employee for tax purposes remains a highly fact-dependant question. The case law derived principles discussed by the UT are central to the extension of the new IR35 rules to the private sector, something else that has been 'paused' by the COVID-19 pandemic[1].

    Background

    PGMOL is a joint venture run on a "not-for-profit" basis, with three 'members' being the Football Association, the Premier League and the English Football League. PGMOL's role is to provide referees and other officials for matches in the most significant national football competitions. It also organises courses, conferences and training for these officials.

    The appeals in question related only to payments (ie match fees and expenses) made by PGMOL to individuals in the so-called "National Group" of elite officials. This is, effectively, the group of elite football officials just below the group who routinely officiate Premier League matches[2].

    This National Group of referees and other officials primarily refereed matches in the second, third and fourth tiers of English football, as well as FA Cup matches and (in capacity as 'fourth' officials) in the Premier League.

    PGMOL's principal argument was that no contractual relationship existed between PGMOL and the National Group referees. These referees are, before the season starts, sent a number of documents (some requiring signature) which include a "Code of Practice", set of "Guidelines" and "Match Day Procedures". However, according to PGMOL none of these in isolation nor taken together amounted to a "contract" between employee and employer. PGMOL's position was that for these National Group officials, match officiating was a hobby (albeit a very serious one). They managed their match officiating around other paid work (which "paid the bills"). These individuals are hugely ambitious and committed, and love the role. They therefore, largely, adhered to PGMOL's requests on a voluntary basis.

    HMRC, in contrast, argued that taking into account the written documents in their entirety and the wider factual matrix, there were express annual contracts between PGMOL and the referees. It was HMRC's position that each individual engagement to officiate at a particular match was a contract of employment, existing in the context of an overarching or umbrella contract.

    FTT decision

    PGMOL's appeal against HMRC determinations for income tax and class 1 NICs was allowed by the FTT. Although the FTT concluded that the National Group referees did each have a contractual relationship with PGMOL (both in the form of individual engagements for specific matches and also a seasonal 'overarching' contract), on the key question the FTT disagreed with HMRC and held that these contractual arrangements did not give rise to a contract of service.

    Applying the established multi-factorial test for employment status, the FTT held (amongst other things) that:

    • the documents contained no legal obligation to provide work or to accept work offered. The FTT noted that "this is not an ordinary situation" as PGMOL is dealing with highly-motivated individuals, who generally wished to make themselves available for such high-profile matches as regularly as possible. There was therefore no need to impose a legal obligation to accept work.
    • there was no sanction if a National Group official could not attend an 'accepted' match for any reason. Rather than being a breach of the contract that the FTT had identified, the official would simply not be paid (and PGMOL would find a replacement).
    • on match day, the referee was undoubtedly in charge; his decisions are final and the FTT was not able to ascribe to PGMOL a sufficient degree of control over the officials to satisfy the test for employment status.
    • the other relevant factors did not otherwise point to a relationship of employment between PGMOL and the officials.

    UT decision

    On 6 May 2020, the UT dismissed HMRC's appeal against the FTT decision concluding that the FTT had not erred in law in its decision that these referees were engaged under contracts for services. Specifically, the UT held that the FTT had not erred in law in concluding that that there was, on these facts which included the lack of a sanction if an official did not attend a match, insufficient mutuality of obligation (which has been descried as the "irreducible minimum" for a contract of employment).

    For more information on the RPC tax team please click here, and on the RPC Sports group please click here.


    [1] The extension of these rules is now planned to take place from April 2021.

    [2] The Premier League officials are employed by PGMOL under full-time written contracts of employment.

    ]]>
    {44CAA638-111D-4B4C-A565-7E9B3535172C}https://www.rpc.co.uk/perspectives/rpc-big-deal/tips-for-minimising-costs-on-part-vii-transfers/Tips for minimising costs on Part VII transfersMon, 11 May 2020 13:09:12 +0100RPC big dealNeil BrownThe Covid-19 crisis is causing many insurers to look at ways of strengthening their balance sheets.  In addition to the flurry of insurer rights issues which have been announced in recent days, it is possible insurers will also look to free up capital by disposing of legacy or run-off business.  Such legacy transactions are often structured by way of a Part VII transfer – a regulator approved court process for transferring insurance liabilities from one insurer to another.

    However, Part VII transfers are notoriously slow and expensive, taking up to 18 months or more to complete.  Some, but not all, of the capital benefit of a Part VII disposal can be achieved by using an up-front reinsurance agreement.  But that still leaves the problem of how to carry out the subsequent Part VII transfer in an economic environment where companies are generally looking to preserve cash and reduce discretionary spending.  This blog sets out some tips for minimising costs on a Part VII transfer.

    Front-load the actuarial analysis – the actuarial workstream is at the heart of any Part VII transfer.  It is crucial that a Part VII transfer will "not materially adversely affect policyholders" – the actuarial analysis which justifies that conclusion will drive all other aspects of the Part VII, including how it is structured legally and how it is communicated to regulators, policyholders and other interested parties.  The actuarial work can be complex, with room for differences of professional opinion between different actuaries – getting the actuarial issues worked out early and clearly will help avoid issues and inefficiencies later on in the process.

    Make it easy for the regulators to say yes – the PRA and FCA are resource constrained even at the best of times. The current crisis will have done nothing to improve their capacity to process Part VII applications.  Given that regulatory review is the main reason for the length of time needed to complete a Part VII transfer, doing everything you can to make the regulatory process smooth and simple will be one of the most important factors in reducing timelines and, therefore, costs.  Early engagement with the regulators is crucial, so as to make sure that they understand the rationale for the transfer and are on-board.  Following that, it will be helpful to both submit documents for review as early as possible and to anticipate questions or concerns that the regulators might have.  Which takes us to….

    Anticipate objections or possible weaknesses – all Part VII transfers are subject to both regulatory scrutiny and the possibility of policyholder objection at court.  Anticipating in advance the grounds of possible challenge will help to make the regulatory approval process smoother and more efficient, with less back and forth question and answer shortly before the court filing deadlines.  As a minimum, applicants should make sure that all of the requirements in the PRA and FCA guidelines have been complied with before documents are submitted to regulators.  Having ready answers to the objections and other gripes that policyholders might raise will help to avoid issues becoming blown out of proportion and simplify the documents which need to be provided to the regulators and the court in the run up to the final court hearing.

    Get the communications right – the communications with policyholders and other interested parties can be expensive, owing to the cost of printing and advertising.  So it is worthwhile investing the time in developing a really solid communications approach plan which the PRA and FCA are happy with – but which avoids the temptation of over-promising at the directions hearing stage.  Scoping out grounds for waivers from the requirement to send hard copy communications packs to all policyholders can help to save a lot of cost.

    Effective project management – a Part VII transfer involves lots of moving parts with input from various different work functions over a long period time (e.g. actuarial, regulatory, legal, policyholder communications, etc).  Given the length of time involved, most people will not be working on a Part VI transfer full time and will need to fit it around other work commitments.  This creates a recipe for missed deadlines and general slippage which can have knock-on effects down the line, and lead to an inefficient process.  Having effective and strong project management can be crucial in keeping the process on track, and the costs under control.

    ]]>
    {5ABDC9B8-AF7B-469D-9910-2740EFAA753E}https://www.rpc.co.uk/perspectives/rpc-big-deal/new-100-government-backed-loan-scheme-for-small-and-mediumsized-businesses/New 100% government-backed loan scheme for small and medium-sized businessesMon, 04 May 2020 15:12:02 +0100RPC big dealSukh Ahark, Lauren MurphyThis fast track-finance Scheme provides loans with a 100% government-backed guarantee for lenders. There won’t be any fees or interest for the borrower to pay for the first 12 months but thereafter interest will be levied at a flat rate of 2.5% per annum. No repayments will be due during the first 12 months and lenders are not permitted to take personal guarantees or take recovery action over a borrower’s personal assets (e.g. their main home or personal vehicle).

    From 9:00am this morning, businesses can apply online through a short and simple form (with only 7 questions), which should hopefully ensure efficiency. The current list of accredited lenders is available here.

    You can apply for a loan if your business:

    • is based in the UK
    • has been negatively affected by coronavirus

    Eligible businesses will be subject to the standard customer fraud, anti-money laundering and know your customer checks before any loan is made. The borrower always remains 100% liable for the debt.

    The following businesses are not eligible to apply:

    • banks, insurers and reinsurers (but not insurance brokers)
    • public-sector bodies
    •  state-funded primary and secondary schools

    You cannot apply if you’re already claiming under the Coronavirus Business Interruption Loan Scheme (CBILS). Although, if you’ve already received a loan of up to £50,000 under CBILS and would like to transfer it into the Scheme, you can arrange this with your lender until 4 November 2020.

    This Scheme appears to seek to address some of the criticisms of other government COVID-19 funding such as speed/efficiency and high interest rates. The Scheme has been met with a warm reception, Mike Cherry, Federation of Small Businesses National Chairman, said: "This crucial new initiative should enable thousands of small businesses to access the working capital they need quickly, helping to protect the millions of jobs they provide in every part of the UK."

    ]]>
    {5DB496B4-C695-4E9D-8000-234EA57F6677}https://www.rpc.co.uk/perspectives/rpc-big-deal/high-court-interprets-meaning-of-indemnity-for-damage-caused-prior-to-completion/High Court interprets meaning of indemnity for damage caused "prior to completion"Tue, 28 Apr 2020 11:53:07 +0100RPC big dealNeil BrownBackground

    In Gwynt y Mor OFTO PLC v. Gwynt y Mor Wind Farm Limited and others [2020] EWHC 850 (Comm), the High Court was asked to interpret an indemnity in a sale and purchase agreement which read:

    "If any of the Assets are destroyed or damaged prior to Completion, then…the [seller] shall indemnify the [buyer] against the full cost of reinstatement…".

    The assets in question were subsea electrical cables which connected an offshore wind farm with the mainland.  These cables were sold by the seller to the buyer pursuant to sale and purchase agreement (the SPA).  Unknown to the parties at the time the SPA was entered into, the cables had been damaged prior to signing the SPA - this damage caused the cables to stop working after completion, necessitating expensive repairs.  The buyer sought to recover the cost of repairs from the seller under the indemnity quoted above.

    The decision

    Lord Justice Phillips, sitting in the High Court, determined that the indemnity only applied to damage caused in the period between signing and completion of the SPA, even though that was only a period of six days.  He rejected the buyer's argument that the words "prior to completion" meant any time prior to completion, including the period prior to signing.

    Factors influencing the decision

    1. Lord Justice Phillips determined that it is necessary to consider the tense used in the drafting, and that the "natural and ordinary meaning" of the phrase "If any of the Assets are destroyed or damaged prior to Completion…" is that it applies to damage or destruction that occurs after the contract is entered into.   He accepted that the interpretation may have been different if the wording had been "If any of the assets have been destroyed or damaged". 
    2. Lord Justice Phillips was influenced by the position of the indemnity within the SPA.  The indemnity was placed at clause 8.2, in between clause 8 which dealt with signing and clause 9 which dealt with completion.  He therefore reasoned that the indemnity relates to damage occurring between signing and completion.  He reached this view even though the SPA included the common provision that headings in the SPA do not affect its interpretation.
    3. Lord Justice Phillips was also influenced by the fact that the subject matter of the indemnity was also covered by a fully negotiated warranty, such warranty being subject to temporal and financial limitations commonly applied to warranties.  He reasoned that the parties would not have negotiated a carefully worded warranty had they intended it to be rendered pointless by a general indemnity.
    4. Lord Justice Philips expressly stated that in reaching his decision on contractual interpretation, he was not influenced by evidence of pre-contractual negotiations.  This evidence was submitted by the seller in relation to its alternative argument on contractual rectification.  Such evidence appeared to show a common intention that the indemnity should be limited to the period between signing and completion and Lord Justice Philips opined, obiter, that such rectification would have been available had the seller's argument on interpretation been unsuccessful.   Lord Justice Philipps was "careful to exclude all the evidence of pre-contractual negotiations from [his] consideration of the proper interpretation of the SPA".

    Lessons to be learned for transactional lawyers

    1. Precision - this decision is another reminder of the importance of the precise wording of each contractual provision. In this case, many millions of pounds turned on whether a 12 word phrase was drafted in the present tense or the past tense.
    2. Clarify – one of the beauties of the English language is it capacity for multiple interpretations and subtleties of meaning.  Whilst this is a boon for a novelist, it is a hazard for a transactional lawyer looking to draft a clear contract.  So if a clause leaves any room for doubt, add extra words to clarify.  "For the avoidance of doubt" provisions are often resisted as being unnecessary, but had the buyer included the words "(including prior to the date of this Agreement)" then the outcome of the case would have been different.  Had the seller used the words "in the period between the date of this Agreement and Completion" then all of the costs and uncertainty of litigation would have been avoided. 
    3. Every word counts – during the negation of the SPA, the buyer provided a draft of the indemnity which read "if any of the assets are defective, destroyed or damaged prior to Completion…".   In a subsequent mark-up the seller removed the word "defective" but left the indemnity otherwise unchanged.  The buyer accepted that change, as is so often the case with seemingly minor drafting changes toward the end of long-running negotiations.  But if that word had been retained, the decision on interpretation would likely have been different.
    4. Be wary of overlapping protections – in relation to potential damage to the cables, the buyer had the benefit of both a warranty and an indemnity.  Such a "belt and braces" approach might be thought of as providing extra protection and security for the buyer.  But in this case, it influenced the court to interpret the all important indemnity more narrowly.  It is very common for indemnities and warranties to cover the same issues. Therefore, it may be helpful for a buyer to set out on the face of the contract the rationale for including both indemnity and warranty protection.
    5. Tell a story – perhaps the most surprising aspect of the decision is that Lord Justice Philips was influenced by the position the indemnity was placed within the SPA.  This shows the importance of the flow of a contract, and whether a third party (with no background knowledge or involvement in the negotiations) can follow a rationale for the provisions included.  In other words, a contract should tell a story.
    ]]>
    {9205758C-D8B5-4117-9E8D-796F196BB409}https://www.rpc.co.uk/perspectives/rpc-big-deal/future-fund/Future FundFri, 24 Apr 2020 16:04:48 +0100RPC big dealSukh Ahark, Lauren MurphyAs start-ups are frequently loss making initially as they invest to grow, they are likely to be ineligible for the other forms of government funding, as they may not be able to prove that they were in sound financial health prior to COVID-19. The Chancellor is keen to bridge this gap to ensure that firms in the dynamic sectors of the UK economy are protected through the crisis in order that they can continue to develop innovative products and help power UK growth. 

    The Future Fund is to be delivered in partnership with the British Business Bank and will launch in May. The fund will provide UK-based companies with between £125,000 and £5million from the government provided that such cash is at least matched by private investors (there shall be no cap on the amount that the matched investor may loan to the start-up). To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years. The more detailed headline terms are available here.

    The government's bridge funding shall automatically convert into equity on the start-up's next qualifying funding round at a minimum conversion discount of 20% (the "Discount Rate") to the price set by that funding round with a company repayment right in respect of accrued interest. On a non-qualifying funding around, at the election of the holders of a majority of the principal amount held by the matched investors, the bridge funding shall convert into equity at the Discount Rate to the price set by that funding round.

    Certain features of the Future Fund suggest that it will work well in practice. The headline terms are similar to the types of terms that investors, start-ups and lawyers are comfortable/familiar with, which is likely to drive efficiency. Also, the use of convertible loan notes is appropriate in these circumstances as it postpones attributing a valuation to a start-up, which can be a cause of time-consuming debates. These features suggest quick access to funds. Although, there is a question of how quickly the government will be able to process the applications, which has been problematic for other types of government financing. Further details about how to apply to this scheme will be published shortly, we will provide an update when more information is released.

    The Future Fund provides some hope for innovative companies and the millions that they employ and hope that the UK will continue to be a leader in the tech industry.

    We are seeing a lot of interest in this fund and are assisting clients on issues around eligibility and preparing for its launch. Please get in touch with Sukh Ahark or your usual RPC contact if you have any questions.

    ]]>
    {DCFEF0C4-F544-404C-A0DD-835F53A14C4D}https://www.rpc.co.uk/perspectives/rpc-big-deal/what-is-covered-by-an-indemnity-for-liabilities/What is covered by an indemnity for "liabilities"?Mon, 20 Apr 2020 17:55:00 +0100RPC big dealDavid WallisCase Reference: Al-Hasawi v Nottingham Forest Football Club Ltd [2019] EWCA Civ 2242

    Background: this case related to the purchase of Nottingham Forest Football Club (the Club) by Mr Evangelos Marinakis from Mr Fawaz Al-Hasawi in May 2017. Although the sale price for the shares in the Club was only £1, the transaction was structured so that the seller's existing loans of £6 million would be repaid by the buyer following completion and the Club would be purchased free of other financial debt.

    This was a relatively unusual transaction in that due to the short period leading up to the signing of the share sale agreement (SPA) the buyer was not able to carry out the usual full due diligence exercise in respect of the Club, and had, to a large extent, to rely on information about liabilities disclosed by the Club. A key document produced by the Club's accounting department in that respect was a trial balance produced in January 2017 from a set of management accounts for the year ending December 2016 that showed the Club's financial position as at that time and specifically showed an overall liabilities balance of £6.6 million.  

    The trial balance was produced in accordance with FRS 102 which requires a company to book liabilities on an accruals basis, ie in the accounting period in which they are incurred, not when they are actually discharged. (Unlike accounts which are prepared on a cash basis which simply record outgoings when they are paid. Accounts prepared on an accruals basis must recognise and report liabilities during the financial period in which the obligation or liability is incurred - an example of a specific accrual relating to a liability of the Club concerned the Club's medical officer Dr Peirce, who invoiced the Club in November 2016 for services to be rendered in the period up to June 2017).

    Discussion around that trial balance resulted in the negotiation and agreement of a specific indemnity in the SPA at clause 7.1 whereby the seller was to indemnify the buyer for any losses suffered if following completion the buyer was able to establish that the actual liabilities position as at 31 December 2016 was more than £6.6 million.  

    Definition of Liabilities: The SPA defined "Liabilities" in specific detail, including (i) a general description of liabilities: "the aggregate amount of all liabilities in respect of any fact, matter or circumstance on or prior to 31 December 2016 (and only to the extent that such liabilities relate to such period); and whether or not due for payment at 31 December 2016; and (ii) some specific examples of items that fell within that definition, (although this also excluded some specific items which were contained in the trial balance, so we can presume that the definition reflected ongoing negotiation between the parties).   

    Completion occurred in May 2017, but in October 2017 the buyer brought a claim against the seller under the indemnity, claiming that there were additional accrued liabilities of approximately £604,000.

    The issue between the buyer and the seller – what did "Liabilities" mean?: The buyer argued that Liabilities was to be calculated in accordance with how they were calculated in the trial balance – ie FRS 102 on an accruals basis. The seller agreed that the definition of Liabilities included liabilities calculated on an accruals basis BUT the words in brackets "(and only to the extent that such liabilities relate to such period)" were specifically included to limit the amount of those liabilities by excluding any costs which are attributable to services provided or events which occur after 31 December 2016. In effect, it would mean that any accrued liabilities would need to be analysed and apportioned so that the seller was responsible only for the actual costs relating to services or events up to 31 December 2016 and the buyer would be responsible thereafter. 

    High Court decision: The High Court gave judgment in favour of the seller. The Judge concentrated in particular on the definition of Liabilities and the specific wording in brackets: "… (and only to the extent that such liabilities relate to such period)…" The Judge concluded that the proper construction of the indemnity was to protect the seller from having to pay for goods and services etc which benefitted the Club in the period after 31 December 2016 and the specific effect of the bracketed words was to exclude liabilities relating to that subsequent period. 

    Court of Appeal decision: The Court of Appeal disagreed with the High Court decision and gave judgment in favour of the buyer.  It held that the purpose of the indemnity was to protect the buyer from undisclosed liabilities and the defined term Liabilities needed to be calculated in accordance with FRS 102 as otherwise it would not be possible to compare the liabilities in the trial balance with the actual liabilities as at 31 December 2016 ie it would not be possible to compare "like with like". A key point for the Court of Appeal was that if the High Court Judge's construction of the definition of Liabilities was adopted and applied to the trial balance then it is very likely that the total of those liabilities would not have even reached the figure of £6.6 million contained in the trial balance. As for the wording in brackets, the Court of Appeal's view was that the bracketed words actually confirmed that the liabilities referred to were accruals relating to the relevant period. To apply the High Court's interpretation of the bracketed words would alter the whole accounting basis of the indemnity provision.

    Conclusion

    Three things to learn from this case:

    1. Legal drafting needs to be clear and concise - be wary of drafting (or accepting the other's side's drafting) where that drafting can create uncertainty.  A single phrase or sentence can often have a totally different meaning to different parties.

    2. Context is important - when drafting an indemnity, make the commercial rationale for its inclusion clear. This will help a third party reading the indemnity to better understand why it has been included. In the new world of modern contractual construction, having signposts in a contract are a useful aid to contractual interpretation because the unitary exercise of contractual interpretation includes considering both the written text and the context.

    3. Was an indemnity the right approach here? A financial adjustment mechanism would have provided the buyer with the certainty of being able to achieve a pound for pound adjustment and would have included much more detail on how Liabilities were to be calculated including by reference to specific accounting provisions.  

    Finally, I have heard that some people consider this to be a harsh (or a cruel) decision. In one respect they are right – it is after all, "accrual decision"…

    ]]>
    {7CAA9652-AD50-434D-843B-A6D53CB3E3F6}https://www.rpc.co.uk/perspectives/rpc-big-deal/regulator-urges-lenders-to-carefully-consider-their-responses/Regulator urges lenders to carefully consider their responses to borrower's potential breaches of covenants owing to COVID-19Mon, 20 Apr 2020 15:58:00 +0100RPC big dealSukh Ahark, Lauren MurphyThe PRA recognised that loan covenants are important to lenders' credit risk management, however, that such risk management should recognise the differences between 'normal' covenant breaches and ones that occur owing to COVID-19. The PRA have gone as far as to say that lenders should consider waiving such covenant breaches where appropriate, and notes that it expects lenders not to impose new charges or restrictions on borrowers following such covenant breach. 

    Practical considerations for borrowers

    • Review and identify the relevant definitions and provisions of the loan – particularly relevant financial covenants may be those tested on a look-forward basis, including interest cover and cash flow
    • Assess whether it is or may become necessary to request a waiver or grace period from the lender if a breach has occurred
    • Evaluate whether the renegotiation of the covenants is necessary 
    • Find evidence to demonstrate that the potential breach of covenants is as a result of COVID-19
    • Liaise with auditors regarding the timetable for audit reporting and how COVID-19 will affect the report

    Read the aforementioned 'Dear CEO Letter' here.

    ]]>
    {1403DF8C-BF49-4C9E-8B4D-28F64A267E11}https://www.rpc.co.uk/perspectives/rpc-big-deal/use-of-e-signatures-in-hong-kong/Signing documents during COVID-19 in Hong Kong Tue, 14 Apr 2020 16:53:00 +0100RPC big dealJason CarmichaelAre electronic signatures legally binding?

    Yes, unless the matter or the act to which they relate falls under an exception. 

    How do I get electronic signatures without access to a printer or PDF machine?

    Traditionally, "electronic signature" has meant a physical wet-ink signature which is scanned in to PDF, and then sent by email.  That approach may not be possible during the current period of government advised working from home.

    The legal definition of an "e-signature" (under the Electronic Transactions Ordinance ("ETO") (Cap. 553)) is wider than this, and includes any letters, characters, numbers or other symbols in digital form attached to or logically associated with an electronic record, and executed or adopted for the purpose of authenticating or approving the electronic record.

    The ETO provides that, where the law requires a person to sign a document (unless either signatory is a government entity, or it is specifically required to have a wet ink signature, such as documents to be filed with the Land Registry),  that requirement is satisfied by their e-signature, provided that:

    1. The person signing attaches their e-signature to an electronic record for the purpose of identifying themself and indicating their authentication or approval of the information contained;

    2. The method used to attach the e-signature is (i) reliable and (ii) appropriate for the purpose for which the information in the document is communicated; and

    3. The person receiving the e-signature consents to the use of that method.

    The ETO specifically states that, in the context of the formation of contracts, if an offer or the acceptance of an offer is in whole or in part expressed in an electronic record, an e-signature shall not be denied legal effect.

    However, there are certain exceptions and the usual conditions apply, including that the signatory must have the necessary authority to sign the document.

    In recent years, electronic signature platforms such as PandaDoc, DocuSign, Adobe Sign and HelloSign have also offered an alternative solution to wet ink signatures.  These applications enable documents to be sent to signatories and signed by that signatory merely clicking on the relevant boxes.  Printers and scanners are not needed. These have not commonly been used in Hong Kong, but this may change given the current circumstances. Additionally, the exceptions set out below will apply.

    Exceptions to e-signatures

    The recognition of e-signatures as having the same effect as a wet-ink signature does not extend to signatures required under the documents set out below.

    Many of these documents require extra formalities (e.g. witnessing, whereby a witness must be physically present and able to sign the attestation clause).  The UK's approach as regards these documents is to recognise an e-signature in relation to these documents as long as those extra formalities are satisfied, whereas Hong Kong's approach, as seen in the ETO, seems to be to exclude e-signatures save to the extent they are specifically allowed for a category of documents.

    The documents to which e-signatures cannot apply includes:

    1. A will, codicil or any other testamentary document;
    2. A trust;
    3. A power of attorney;
    4. Any instrument required to be stamped (other than a contract note which falls under s 5A of the Stamp Duty Ordinance (Cap. 117);
    5. Government conditions of grant and Government leases;
    6. Any deed, conveyance or other document or instrument in writing, judgments, and lis pendens referred to in the Land Registration Ordinance (Cap. 128) which may affect any parcels of ground tenements or premises in Hong Kong;
    7. Any assignment, mortgage or legal charge within the meaning of the Conveyancing and Property Ordinance (Cap. 219) or any other contract relating to or effecting the disposition of immovable property or an interest in immovable property;
    8. A document effecting a floating charge referred to in s 2A of the Land Registration Ordinance (Cap. 128);
    9. Oaths and affidavits;
    10. Statutory declarations;
    11. Judgments or orders of court;
    12. A warrant issued by a court or a magistrate; and
    13. Negotiable instruments (excluding cheques that bear the words "not negotiable").

    E-signatures also do not apply in relation to the signatures required for the purposes of any legal, arbitral, regulatory or disciplinary proceedings, unless the relevant legislation relating to those proceedings provides for its application.

     

    ]]>
    {E56A87C9-3FE8-442F-BCFE-10FA056E1B1F}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-new-coronavirus-large-business-interruption-loan-scheme/The new Coronavirus Large Business Interruption Loan Scheme Thu, 09 Apr 2020 13:47:04 +0100RPC big dealSukh Ahark, Lauren MurphyThe details of the scheme can be downloaded below.]]>{D3C00B8C-DA3D-4660-A1F2-F481065E6438}https://www.rpc.co.uk/perspectives/rpc-big-deal/covid19-and-tax-residence/COVID-19 and tax residenceThu, 09 Apr 2020 11:39:00 +0100RPC big dealBen RobertsUPDATE

    On 7th April 2020, HMRC published updated guidance on both (1) company residence for tax purposes, and (2) risk of creating a UK permanent establishment (PE) in each case in light of the Covid-19 pandemic.

    On company residence HMRC state they are "very sympathetic" to the significant disruption caused by Covid-19 to the location of directors, employees and other individuals. Whilst HMRC express the view that existing legislation and guidance provide flexibility to deal with issues raised by Covid-19 the new guidance helpfully confirms HMRC‘s view that occasional UK board meetings, or participation in such meetings from the UK, would not necessarily result in the central management and control (CMC) of a non-UK company becoming located in the UK. The new guidance also (in the specific context of the current health crisis) points out that even if CMC were to become located in the UK, the 'tie-breaker' article of any applicable double tax treaty may well have the effect that the company remains non-UK resident. See here for the new guidance.

    On UK permanent establishment risk, the new HMRC guidance also adds that (1) whether contracts are "habitually" concluded in the UK will remain a question of fact and degree, and (2) for a PE to arise in the UK as a result of a non-UK company having a fixed place of business here would require that place of business to have a degree of permanence (with, again and in each case, existing legislation and guidance being deemed by HMRC as providing sufficient flexibility to deal with the problems posed by the Covid-19 pandemic in this area). See here for the new guidance.

    Separately, the OECD has published an "analysis" of the impact of Covid-19 on double tax treaties (also looking to address concerns as to the inadvertent creation of a PE due to Covid-19 travel restrictions). See here for the OECD's views.

    At the time of writing, no official UK guidance has been published as to the effect of Covid-19 related travel restrictions on the place of "belonging" for VAT purposes.

    Original article 

    HMRC moved quickly to issue guidance to assuage concerns that self-isolation and travel restrictions resulting from the COVID-19 pandemic would not adversely impact on the tax residence status of individual taxpayers.

    But what about the tax residence of offshore companies and other vehicles? The current health crisis could result in UK-based directors:

    • being unable to leave the UK
    • being advised not to travel from, or advised to self-isolate in, the UK

    Offshore structures, particularly in the funds industry, are carefully crafted so that the offshore entities do not find themselves within the scope of the charge to UK corporation tax, or subject to UK VAT. At a time of heightened financial and social uncertainty, such structures may need to take strategic decisions at short notice. The tax implications of the practical means of doing so should not be overlooked.

    Corporation tax

    A company incorporated outside of the UK may find itself, as a matter of UK law1, resident in the UK for corporation tax purposes (and therefore subject to UK tax on its worldwide profits) if it is "centrally managed and controlled" in the UK. The location of the central management and control (CMC) of a company is a question of fact but (broadly) will be found where the highest level of control of the company is exercised.

    Typically, the CMC of a company will be exercised where its board of directors meet, and actually take decisions that amount to the carrying out of the highest level of control of the company.

    Best practice dictates that board meetings of non-UK companies should therefore take place outside of the UK, with any UK-resident directors of the non-UK company leaving the UK before participating in a board meeting.

    At a time when we are all getting used to keeping in contact via a plethora of means that do not involve face-to-face meetings, UK-resident directors of non-UK companies should think very carefully about joining board meetings by video or telephone conference whilst physically present in the UK. The consequences of doing so, in terms of the UK tax residence status of the company, could be severe.

    Value Added Tax

    The so-called "place of supply" rules determine whether cross-border services are subject to VAT (and, if so, in which jurisdiction).

    The general rule2, for business-to-business (B2B) cross-border supplies of services, is that VAT is charged where the recipient "belongs". The general rule3 for business-to-customer (B2C) cross-border services supplies is that VAT is charged where the supplier "belongs". The place where the recipient and supplier of such services "belongs" is therefore of vital importance.

    For VAT purposes, in respect of a supply of services a business "belongs":

    • if they only have one "business establishment"4 or "fixed establishment"5, in the jurisdiction where that establishment is located; and
    • if they have such an establishment(s) in more than one jurisdiction, in the jurisdiction in which the establishment that is most directly concerned with the supply is located

    If, as a result of travel restrictions arising out of the COVID-19 pandemic, a non-UK business finds itself inadvertently established in the UK for VAT purposes, this could give rise to an (unexpected and irrecoverable) VAT charge.

     

    1 See here.

    2 Subject to the terms of any available double tax treaty.

    3 Subject to a number of exceptions.

    4 Again, subject to exceptions.

    5 i.e the head office or 'seat' from where the business is run.
      
    6 For example, a branch.

    ]]>
    {FE615344-62BF-4674-9F0E-E2F40EA8B0C6}https://www.rpc.co.uk/perspectives/rpc-big-deal/coronavirus-business-interruption-loan-scheme-attempts-to-address-inaccessibility/Coronavirus Business Interruption Loan Scheme – attempts to address inaccessibility Wed, 08 Apr 2020 12:17:03 +0100RPC big dealSukh Ahark, Lauren MurphyWe previously published a blog on some of the issues facing SMEs when trying to access the Coronavirus Business Interruption Loan Scheme (CBILS). This highlighted some criticisms of participating lending institutions regarding their creating barriers to access e.g. insisting on the provision of personal guarantees for loans under £250,000. Lending institutions were further criticised for asking businesses to pay interest rates of as much as 30%.

    Such barriers are demonstrated by the Treasury reporting that only 1,000 businesses have been granted loans under the CBILS, whilst there have been over 130,000 enquiries from businesses regarding loans. The British Chamber of Commerce stated last week that more than half of the country's SMEs were at risk of closing their doors in the absence of such economic relief.

    It appears the government has responded to these criticisms through implementing the following changes to the CBILS which apply from 6 April 2020:

    • The CBILS will be available to all viable small businesses affected by COVID-19 and not just those unable to secure regular commercial financing
    • Lenders are prohibited from requesting personal guarantees for loans under £250,000. For facilities over £250,000 personal guarantees may still be required (at the discretion of the lender) but recoveries under these will be capped at a maximum of 20% of the outstanding balance after the proceeds of business assets have been applied and a principal private residence may not be taken as security. The new rules will also apply to existing borrowers under the scheme
    • Operational changes are being made to speed up lending approvals

    These will be welcome changes for SMEs whose attempts to secure financing have been frustrated, and hopefully should mean that more businesses are eligible. Although the interest rates that banks can charge have not been capped, last week the Chancellor and the Governor of the Bank of England wrote to banks asking them to support SMEs in any way possible, including by ensuring that interest rates offered to struggling businesses are reasonable and by passing on the benefit of the government guarantee to those borrowing under the CBILS.

    ]]>
    {586E61C8-FD09-4B5B-A12A-20E5DAAB788A}https://www.rpc.co.uk/perspectives/rpc-big-deal/managing-smandcr-during-the-coronavirus-crisis/Managing SM&CR during the Coronavirus crisisThu, 02 Apr 2020 09:03:49 +0100RPC big dealJonathan CharwatAlthough we are all finding ourselves stretched at the moment, both at home and in our working lives, and health and wellbeing is the first priority, it is worth considering the implications of the current circumstances on your firm's governance and compliance with SM&CR. Despite the unprecedented circumstances, failure to consider and address these implications potentially risks attracting regulator criticism later down the line.

    At this time, your firm might be dealing with, amongst other things:

    • staff absences as a result of illness or furlough and the inevitable consequences of fewer people working in the business;


    • reduced work capacity due to caring responsibilities. See also our blog on the identification of your firms' key workers; and

    • adapting to new ways of working and working though the limitations of systems used in your business.
    Below we set out some questions to consider when addressing the implications of staff absences, reduced capacities and systems limitations on your firm's governance and compliance with SM&CR.

    1. Responsibilities / functions 

    • Do the functions and responsibilities of your Senior Managers and/or Certified Persons need to be redistributed?

    • Note that the functions of a senior manager can be covered by a non-approved individual for up to 12 weeks (see SUP10C.3.13R 'the twelve week rule').  So far, we are not aware of any move within the regulator to extend this period in the current situation. 
    2. Reporting lines / escalation procedures

    • Do reporting lines / escalation procedures need to be amended?  

    • For example, if a certain member of staff in a reporting line is unwell or even furloughed, do other members of staff know how to handle this and report to the next person in the chain of reporting?Does the next person in the reporting line have the capacity to deal with the extra workload?
    3. Information / documentation / records

    • Do your Senior Managers have access to all of the information, including management information, that they need to carry out their functions effectively?

    • Does any governance documentation (for example responsibilities maps and job descriptions) need to be amended? 

    • Are records being kept/updated? Ensure that persons with new responsibilities/functions know to keep appropriate records.
    4. Handover: If possible, has a handover been effected?

    5. Fit and proper / training: 

    • Do any new temporary senior managers or certified persons need to be assessed internally as fit and proper (consider CRB checks too)?

    • Is any training required for persons with new responsibilities/functions?

    • How will that training be delivered in the new working environment?
    •  

    ]]>
    {475860BC-6D80-4FFA-AE6B-81B3844683B9}https://www.rpc.co.uk/perspectives/rpc-big-deal/the-government-backed-coronavirus-business-interruption-loan-scheme/The government-backed Coronavirus Business Interruption Loan SchemeMon, 30 Mar 2020 17:53:47 +0100RPC big dealThe details of the scheme can be downloaded below.

    ]]>
    {0A0807F3-4BC2-4B85-95C7-355B9049BC9E}https://www.rpc.co.uk/perspectives/rpc-big-deal/covid-19-forces-hmrc-to-temporarily-change-its-stamp-duty-processes/COVID-19 forces HMRC to temporarily change its stamp duty processesThu, 26 Mar 2020 14:40:47 ZRPC big dealBen RobertsThis will be of interest where (1) stamping will be required in the near future, or (2) stamping has already been requested by post (but the forms have not yet been returned).

    The latest guidance should be followed to avoid unnecessary delays in registering changes in share ownership of UK companies.

    In summary:

    1. Stock transfer forms and other instruments of transfer should not be posted to HMRC for physical processing.

      Instead, they should be sent by email. (for example, by PDF). An electronic version of form SH03 can be emailed to HMRC to notify it of a company's purchase of its own shares. HMRC will accept e-signatures on forms or instruments while this measure is in in place. Those unable to get forms or instruments signed and dated should email HMRC.

      If forms or instruments have already been sent by post to the Stamp Office, they should be resubmitted electronically (providing details of any payments already made). Otherwise, the instruments will not be assessed or returned until the temporary measures end.

       

    2. Payment of stamp duty must be made electronically (e.g. by BACS or CHAPS) and details of the transaction must be sent to HMRC by email rather than by post.

    Electronic payment of stamp duty is already best practice, but HMRC have now made it clear that payments by cheque will not be banked until the temporary measures end (so HMRC will not process the transaction even if it has received the details by email).

    Anyone unable to make electronic payments should email HMRC. Copies of stock transfer forms or instruments of transfer submitted with transaction details must be electronic and, again, HMRC will accept e-signatures.

    The HMRC email address for these purposes is stampdutymailbox@hmrc.gov.uk

    ]]>
    {0F086685-D007-4803-BB5D-6461FB2A7B69}https://www.rpc.co.uk/perspectives/rpc-big-deal/covid-19-and-commercial-tenants-rights-regarding-rent/COVID-19 and Commercial Tenants' Rights Regarding RentWed, 25 Mar 2020 11:37:38 ZRPC big dealElizabeth AlibhaiThe Prime Minister's latest announcements requiring business closures and social distancing (Prime Minister's Speech 23 March 2020) have left offices and other commercial properties across the country empty. 

    The first port of call is each individual lease, but the vast majority do not contain any force majeure or similar provisions allowing tenants to stop paying rents on the happening of occurrences beyond the landlord's reasonable control. Tenants should therefore be mindful of the remedies at the landlord's disposal should they fail to pay rent as it falls due without securing a formal concession.

    Not only can the landlord usually claim interest on any rent that is not paid by its due date (at the rate specified in the lease), commercial leases invariably include a right for the landlord to forfeit the lease on failure to pay all or any part of the rent (usually 14 or 21 days after it falls due). Once the right to forfeit has arisen, the landlord can exercise it either by peaceable re-entry of the property or by serving court proceedings. The tenant would be liable for the landlord's costs in forfeiting the lease, including any court proceedings. 

    A tenant can apply to court for relief from forfeiture where it is able to remedy the breach of covenant, but all arrears, including interest and costs, and both parties' court costs would be payable. 

    The landlord will have other avenues for recourse where additional forms of security, such as a guarantee or rent deposit, have been provided. Where a guarantee is in place, the landlord can generally seek payment of rent arrears, costs, expenses and interest from the guarantor directly. Many guarantees also include a right for the landlord to require the guarantor to take a new lease of the premises at the same rent and containing like covenants when the lease is forfeited. Where a rent deposit is in place the landlord can draw down sums from the rent deposit to cover the arrears and make additional withdrawals when further sums fall due and remain unpaid. The tenant is usually required to top-up the rent deposit when withdrawals are made, and failure to do so usually gives the landlord an additional ground on which to forfeit the lease.

    In practice, however, landlords are often reluctant to forfeit a lease where it will struggle to re-let. Landlords also have to consider practical issues such as empty property rates and reletting and security costs.  Accordingly, we have seen a number of tenants agree rent-free periods of three months or more, sometimes deferred where landlords have an immediate cash need. What can be achieved in each case depends on the leverage that can be brought to bear such as any upcoming break opportunities and on-going renewal negotiations. 

    Government ban on evictions

    On the evening of 23 March the Government issued a press release in which it stated that it was introducing measures that would mean that "no business will be forced out of their premises if they miss a payment in the next 3 months". The proposals have now been made law under the 'Coronavirus Act 2020' which received royal assent on 25 March 2020. The new legislation states that no right of re-entry or forfeiture may be enforced due to non-payment of rent until the end of the 'relevant period' (30 June 2020 (unless extended)). Although further clarification is needed from the Government as to what the position will be with regards to rent that is not paid during the relevant period once the period has ended, the suspension on forfeiture rights should give commercial tenants some comfort in the short term. 

    This is just the latest of a number of measures brought forward to support businesses through the current crisis. Other measures include deferred VAT payments, a business rates suspension for many businesses, grants of up to £25,000 for businesses in retail, leisure and hospitality with a rateable value of up to £51,000, loans under the "Coronavirus Business Interruption Loan Scheme" for SMEs and lending facilities by the Bank of England for larger businesses to support liquidity (Gov.uk).

    During these very challenging times, tenants should seek advice before withholding rent and ensure that any agreed concessions are properly documented. We will be publishing further guidance for tenants over the coming weeks.

     

     

    ]]>
    {A60716B0-18CF-4829-9841-3EDF5A93EBFA}https://www.rpc.co.uk/perspectives/rpc-big-deal/spring-budget-2020-main-tax-announcements/Spring Budget 2020 - main tax announcements Thu, 19 Mar 2020 14:47:46 ZRPC big dealBen RobertsBy the time Rishi Sunak gave his first Budget announcement last Wednesday it was impossible to ignore the most important issue facing the nation; the impact of coronavirus on the country's health, economy and ability to proceed with 'business as usual'. A little over a week later and it's fair to say that the situation has developed in a manner, and at a pace, that few of us had predicted.

    The focus of the new Chancellor's maiden Budget speech was the Government's planned response to the upheaval caused by the spread of this virus. In the days that have since passed, the magnitude of the crisis has already resulted in one measure being postponed (the extension of the off-payroll working rules to the private sector). This seems unlikely to be the only planned tax measure knocked off course by Covid-19.

    The main business and personal tax announcements made by the new Chancellor last week, summarised below, may (understandably) not rank highly on the priority list for most businesses and individuals at the moment. Indeed, and again perhaps understandably, there were relatively few big tax announcements. That said a number of announcements did catch the eye.

    Entrepreneurs' Relief – reduction in lifetime limit

    In the build-up to the Budget announcement, there was much press speculation as to possible changes to entrepreneurs' relief (ER). The speculation ranged from relatively minor tweaks to ER to full abolition of this generous tax relief. As Budget Day approached, full abolition appeared more and more likely, at least according to press reports.

    The change announced on 11th March was an immediate reduction in the ER lifetime limit from £10m to £1m. Generally speaking, the change takes effect for disposals made on or after 11th March 2020. So-called 'anti-forestalling' rules will apply to prevent pre-Budget tax planning from allowing sellers to retain the £10m limit. This is expected to raise £1.8bn for the Government by 2024-25. ER is a highly valuable form of tax relief. It is available to certain individuals who realise certain types of qualifying gains. Most commonly it applies to employees and office-holders on sales of shares in trading companies in which they have sufficient share capital, voting and economic interests. Prior to last week's announcement, it provided for a reduced (10%) rate of CGT on the first £10m of qualifying gains, which equated to a potential tax saving of up to £1m for qualifying taxpayers.

    A major criticism of ER has long been that it does not, in fact, encourage genuine entrepreneurship. It has also been an expensive form of tax relief for the Treasury. That said the Chancellor is already facing criticism that this move has sent out the wrong message at a time when UK businesses (and their owners) need all the encouragement they can get.

    SDLT surcharge for foreign buyers of residential property

    From 1 April 2021, a stamp duty land tax (SDLT) surcharge of 2% will apply to acquisitions of English and Northern Irish residential property by non-UK resident buyers. Property in Scotland and Wales is now governed by devolved land transaction tax regimes.

    Since the proposal was first floated in the Autumn 2018 Budget, the anticipated rate of this SDLT surcharge has ranged from 1% to 3%.

    The extra SDLT raised by this measure (estimated at around £105m a year) will be used to tackle rough sleeping, according to documents published last week. It had been expected that there will be a surge in residential property purchases by non-UK buyers, in advance of this surcharge taking effect.

    Review of taxation of investment funds

    The Government plans to undertake a review this year of the UK funds regime, to include the direct and indirect tax treatment of UK funds.

    As part of this, there will be a consultation on the tax treatment of "asset holding companies" (AHCs) in alternative fund structures. The Government has noted that AHCs are typically located outside of the UK and states that it wants to explore ways to make the UK more attractive as a jurisdiction for such companies. This is clearly to be welcomed, but it is far from guaranteed that reforms to the UK tax regime will be made.

    There is also to be a review of the VAT treatment of fund management fees.

    Covid-19 and "time to pay" arrangements

    There is to be a new "time to pay" scheme, for businesses and self-employed persons who find themselves in financial difficulties due to the Covid-19 pandemic. Tax liabilities will be able to be deferred for a period, with interest and penalties arising on late payment of tax to be waived.

    Companies in liquidation and the corporate capital loss restriction

    It has been announced that companies in liquidation will not be caught by the capital losses restriction that will apply from 1 April 2020. This restriction applies a 50% limit on chargeable gains accruing after 1 April 2020 that can be sheltered by carried forward capital losses.

    VAT and e-publications

    From 1 December 2020, zero-rating VAT treatment will apply to electronic publications (such treatment already applies to physical books, newspapers, journals and periodicals).

    HMRC's "preferred creditor" status

    At Budget 2018 it was announced that, from April 2020, HMRC would (in part) regain its "preferred creditor" status. HMRC is still to be granted priority in recovering VAT, PAYE income tax, employee NICs and construction industry scheme deductions (ie taxes the insolvent business collected on behalf of other taxpayers) but this measure will now be delayed until 1 December 2020.Personal tax

    As is the norm, the Spring Budget announced a number of changes to personal taxation, including:

    • An increase in the CGT annual exempt amount for individuals (from £12,000 to £12,300) from April 2020.
    • An increase in the threshold income (from £110,000 to £200,000) for tapering of the annual allowance under the pensions tax regime, from 6 April 2020.

    As planned

    Finally, it was confirmed by the Chancellor that a number of important new tax measures are to take effect as planned. Of most significance are:

    • Extension of "off-payroll" working regime: it was announced on 11th March that the much-criticised planned extension of the "off-payroll" ('IR35') rules to medium and large private sector business would take place, as planned, from 1 April 2020. As noted above however, this position has since been changed in light of the Covid-19 crisis such that this measure is now planned to take place from April 2021. This will be a very welcome move for affected businesses and workers, who had been lobbying hard for this extension to be delayed.

       

    • Digital Services Tax: the new 2% digital services tax (DST) is to apply from 1 April 2020. There had been some speculation that the hostility towards the DST from the US, in particular given what might become quite fraught negotiations over a UK/US trade agreement, could test the Government's commitment to the DST.

       

    • Reversal of planned cut in rate of corporation tax: as announced before Christmas, it has been confirmed that the main rate of corporation tax is to remain at 19% for the tax year beginning 1 April 2020 (despite the previous announcement that the tax rate would fall to 17%).

       

    • Increase in rate of R&D expenditure credit: as previously announced, the rate of the "above the line" tax credit is to increase from 12% to 13% for qualifying R&D expenditure incurred from 1 April 2020.
    ]]>
    {52E6EE04-EFC0-4F5C-A779-CB5A67366941}https://www.rpc.co.uk/perspectives/rpc-big-deal/signing-documents-during-covid-19/Signing documents during COVID-19Wed, 18 Mar 2020 17:50:00 ZRPC big dealNeil BrownAre electronic signatures legally binding?

    Yes.  

    How do I get electronic signatures without access to a printer or PDF machine?

    Traditionally, "electronic signature" has meant a physical wet-ink signature which is scanned in to PDF, and then sent by email.  That approach may not be possible during the current period of government advised working from home. 

    In recent years, electronic signature platforms such as PandaDoc, DocuSign, Adobe Sign and HelloSign have offered an alternative solution.  These applications enable documents to be sent to signatories and signed by that signatory merely clicking on the relevant boxes.  Printers and scanners are not needed.  Law Commission guidance, published on 4 September 2019, indicates that such signatures will be recognised as valid.

    What if I have a deed which needs witnessed?

    The witnessing of documents (such as deeds) can also be done electronically.  Platforms such as DocuSign allow for this also.

    However, a witness will need to be physically present with the signatory when he or she attaches their signature.  Unfortunately, video link will not (for the time being at least) count as being physically present for these purposes – although this is under review.  Best practice has always suggested that a witness should be independent of a signatory – however, that is not a legal requirement.  Therefore, in times of self-isolation and restricted movement, it should be possible for family members or cohabitees to act as witness.

    ]]>
    {A63132F5-0FF8-4CA5-95F0-9872B38CC5B2}https://www.rpc.co.uk/perspectives/rpc-big-deal/navigating-the-dead-zone-understanding-liquidation-preferences-in-venture-capital-2/Navigating the dead zone: Understanding liquidation preferences in venture capital #2Mon, 16 Mar 2020 15:30:00 ZRPC big deal{E8FC6DB2-1B67-432A-B8B9-160C0E96FA9E}https://www.rpc.co.uk/perspectives/rpc-big-deal/restrictive-covenants-in-shareholders-agreements-and-commercial-contracts/Restrictive covenants in shareholders' agreements and commercial contractsFri, 06 Mar 2020 10:15:04 ZRPC big dealBen MagahyWhen employees leave an organisation, they are often subject to restrictions on competing with and soliciting customers, employees and suppliers from their former employers. Such restrictions are typically found in employment agreements, but are also often included in other commercial contracts such as shareholders' agreements or share purchase agreements. The enforceability of restrictive covenants has been the subject of much case law and decisions are often fact-specific, but it is generally accepted that such restrictions are enforceable where they are shown to be reasonable and that the English courts tend to assess reasonableness much more strictly in the context of employment contracts than in other commercial contracts. In a recent case, the Court of Appeal reaffirmed the approach of the English courts to the enforceability of restrictive covenants in shareholders' agreements and other commercial contracts.

    In Guest Services Worldwide Ltd v Shelmerdine [2020] EWCA Civ 85, the Court of Appeal considered a shareholders' agreement which contained clauses prohibiting employee shareholders from competing with the company's business and from soliciting customers, employees and suppliers both during their employment and for a period of 12 months after they ceased to be shareholders. The High Court had found that:

    • the proper construction of the specific clauses in the shareholders' agreement was that the restrictions would only bind an employee shareholder for so long as they were both an employee and shareholder of the company – if a person ceased to be an employee but continued to be a shareholder, then the restrictions would cease to apply to that person; and
    • even if the above construction were wrong and the restrictions would apply to a former employee who continued to be a shareholder until 12 months following that person ceasing to be a shareholder, the restrictions would be unenforceable because the duration was longer than reasonably necessary for the protection of the company's legitimate business interests.

    These two findings were appealed to the Court of Appeal. Overturning the first instance decision, the Court of Appeal decided that:

    • taking into account the factual and commercial context of the shareholders' agreement, the correct construction of the specific clauses was that the restrictions would apply to a former employee who remained a shareholder, and that the 12-month period would begin from the date that the former employee ceased to be a shareholder in the company; and  
    • those restrictions were not unenforceable as to duration (the enforceability of the restrictions as to scope and area was not considered by the Court of Appeal).

    Duration

    It was relevant to the Court of Appeal's decision on the issue of duration that the company's articles of association contained compulsory transfer provisions that would apply on an employee shareholder ceasing their employment and set out a tight timetable for a compulsory transfer of shares to be effected. Any employee shareholder who ceased to be an employee would likely cease to be a shareholder shortly thereafter, and this would have been understood by the parties at the time the shareholders' agreement had been negotiated. The 12-month period would therefore have been expected to begin a short period after an employee shareholder's employment had terminated. The Court stated that it would not declare the restrictions to be unenforceable as a result of the 'relatively unlikely possibility' of considerable delay to a transfer of shares or the 'very unlikely possibility' of permanent lock-in of an employee shareholder, notwithstanding that the shareholder in this case had been subject to a delay in selling his shares and remained a shareholder in the company.

    The Court's decision on duration highlights an important point for companies and employee shareholders to be aware of, in that even with compulsory transfer provisions there is no guarantee that there will be a buyer for a former employee's shares, particularly in a small private company. Where a restrictive covenant continues to apply while a former employee remains a shareholder and for a period thereafter, that former employee could in some circumstances continue to be bound by the restrictive covenants for a considerable period of time. It is for this reason that shareholders' agreements are normally drafted such that the restrictions apply either from the date an employee shareholder's employment terminates or, if earlier, the date notice is given to terminate such employment.

    Distinction between employment contracts and commercial contracts

    While much of the judgment was concerned with the construction of the relevant restrictive covenants, the Court's decision also reaffirms the distinction that English law makes between restrictions in employment contracts and restrictions in shareholders' agreements and other commercial contracts such as share purchase agreements.

    While the general position is that restrictive covenants, as restraints of trade, which apply to departing employees are only enforceable if the employer can show that the restrictions protect a legitimate proprietary interest of the employer and are no more than is reasonable having regard to the interests of the parties, the English courts are strict when applying these rules to employment contracts. This is because of the imbalance in the bargaining power of the employer and employee in negotiating the employment contract.

    In the context of restrictive covenants in shareholders' agreements or other commercial contracts, the English courts are generally regarded as being more flexible on the grounds that, having been negotiated in a commercial context, there is likely to be more-balanced bargaining power between the parties. The English courts will still consider the restraint of trade doctrine and will assess the reasonableness of any such restrictions, but will apply a lower level of scrutiny in doing so.

    The Court of Appeal in Guest Services Worldwide reviewed some of the authorities setting out the distinction between employment agreements and commercial contracts, and stated its agreement that the English Courts are less vigilant when assessing shareholders' agreements or similar agreements. In the context of that case, the Court of Appeal decided it was clear that:

    • the company had a legitimate interest in seeking to prevent employee shareholders competing with the business and soliciting clients;
    • the clause was contained in a shareholders' agreement made between experienced commercial parties; and
    • a period of 12 months, even though running from the date the employee shareholder ceased to be a shareholder rather than the cessation of employment, was 'entirely reasonable' to protect that interest.
    ]]>
    {28DE952B-1C57-40A8-BA18-A0D85EDCC496}https://www.rpc.co.uk/perspectives/rpc-big-deal/life-expectancy-what-is-the-big-deal/Life Expectancy - What's the Big Deal?Fri, 21 Feb 2020 15:12:48 ZRPC big dealLongevity risk is the risk that policyholders or pension scheme members, in the aggregate, live longer than expected. Insurers can be particularly exposed to longevity risk when they insure books of annuity business or pay out claims subject to periodic payment orders (e.g. in catastrophic personal injury cases). Defined benefit pension schemes can also be exposed.  The longer the policyholder lives, the more the insurer or pension scheme must pay out, leading to unprofitable business for insurers and shrinking funds for pension schemes. The risk is increased by growing life expectancy trends and more people reaching retirement age.

     

    What are longevity risk transfers? 

     

    Insurers and pension schemes can mitigate longevity risk through various types of transactions, backed by insurance or capital markets. A growing market has developed with a flow of pensions liabilities and annuities being insured and reinsured.

     

    Options include:

    • Longevity risk (re)insurance contracts – an insurer of annuities or a pension scheme operator will (re)insure its liabilities to policyholders / members under a reinsurance contract. Insurers of annuities can go on to achieve legal finality with a transfer of the assets pursuant to a Part VII transfer (as illustrated by the transfer of £6.4bn of annuity policies from Aegon to Rothesay Life).
    • By reinsuring longevity, an insurer can reduce the amount of capital it must hold pursuant to its Solvency Capital Requirement (SCR) under Solvency II. Life insurers are often recipients of annuity reinsurance business as a diversification technique; its own portfolio of life policies is typically sensitive to longevity risk in the opposing way
    • Longevity risk swap  – similar to the above but structured as a derivative backed by an investment bank.
    • Buy-ins – the pension scheme purchases an insurance contract as an asset of the pension plan, whereby the insurer agrees to pay benefits to the pension scheme in exchange for an up-front premium. The pension scheme remains liable to its members for payment and administration.
    • Buy-outs – a finality solution for de-risking a pension scheme. The pension scheme purchases an insurance contract on behalf of its members, with the effect that the pension scheme no longer has any future liability to the members. The insurer has a direct relationship with the members and pays them directly. 

    What are the risks?

     

    The PRA expects insurers accepting risk and transferring risk to understand the risk transfer taking place and to ensure that the economic impact is adequately reflected in business planning and capital setting. Insurers must have a clear articulation of their exposure and tolerance of risks arising from longevity risk transfers within a clearly defined risk appetite.


    Counterparty risk

     

    An insurer accepting risk from, transferring risk to, or hedging risk with, a single or small number of counterparties (or connected counterparties) may expose itself to possibly significant levels of risk that a counterparty defaults on its credit obligations.  

     

    The PRA expects firms to manage and mitigate this counterparty credit default risk under Solvency II. Firms must have an effective risk management system which should cover risks which are covered by the SCR as well as those which are not, or not fully, included in the calculation of the SCR. Holding capital under the SCR in relation to counterparty default risk may not be sufficient in and of itself to mitigate the risk, and firms should consider other measures.

     

    Basis risk


    Basis risk is the residual risk that can arise where an insurer transfers or receives longevity risk using an index-based transfer structure (for example based on a population mortality rates index). As the reference population of the index is not identical to the population of the pension scheme or annuity portfolio subject to the hedge, there is a risk that the cash flows from the hedge will not match the liabilities of the scheme or portfolio. The PRA requires insurers to understand the risk associated with this imperfect hedging as part of their risk management frameworks.  

     

    What are the PRA notification requirements?

     

    In order to supervise firms' risk management practices, the PRA expects to be notified of new large and/or complex longevity risk transfer and hedge arrangements and the firm's proposed approach to risk management well in advance of the completion of any transaction.

     

    A large and/or complex transaction is one that has:

     

    • a value or financial impact that is larger than typically transacted on a BAU basis;
    • a structure more complex than a BAU transaction (examples include where the risk transfer is structured using less tested instruments such as insurance linked securities or automatic reinsurance pools);
    • a material incremental impact on the firm's ability to meet its SCR.

     

    The PRA has simplified the pre-notification requirement for all other longevity risk transfers and created a reporting template for firms to complete. Key components of the form, and of interest to the PRA, include whether it is an intra-group transaction, the structure of the transaction, any collateral or funds-withheld elements, and any additional features, for example if it is a precursor to a Part VII Transfer.

    ]]>
    {8BB7F25E-81F6-4417-898B-2E1249A314BC}https://www.rpc.co.uk/perspectives/rpc-big-deal/uk-formally-leaves-eu-practical-matters-you-ought-to-be-thinking-about-now/UK formally leaves EU - practical matters you ought to be thinking about nowFri, 07 Feb 2020 10:52:00 ZRPC big dealDuring this transition period the UK and the EU will try to hammer out the future relationship. The EU consider the timing too short. Boris Johnson insists there will be no extension beyond 31 December 2020. There are plenty of commentators providing views such as:

    a) A framework agreement will be agreed within this time period covering the big points if not all the detail.

    b) There will be an extension.

    Few say there will be a no deal scenario, but nobody knows for sure. 

    The big issue to be resolved is the extent to which the UK needs to align with EU regulations. The EU is maintaining that to have significant free access to the EU market, the UK must align; the EU is concerned about 'unfair' competition if the UK becomes a 'regulatory light jurisdiction'. Boris Johnson is most reluctant, for now, to concede this.

    For UK businesses and international businesses operating in the UK or trading from the UK into the EU are there any practical matters you ought to be thinking about now? A few thoughts are set out below. 

    • Goods: The government is advising that all exporters and importers of goods across EU/UK borders register for an Economic Operators Registration and Identification number (EORI) to help facilitate the movement of goods from the UK to the EU and vice versa. This applies whether or not a deal is struck. If your business imports or exports services, and doesn’t move physical goods across borders, it will not need an EORI.
    • Personnel: Many businesses will have staff members who are EEA or Swiss nationals (the EEA includes EU countries and also Iceland, Liechtenstein and Norway). Regardless of the future trading relationship, EEA or Swiss citizens will need to make a free application under the EU Settlement Scheme and prove their identity to continue living and working in the UK. If no deal is struck this needs to be done before 31 December 2020. A longer period applies if a deal is done but why wait and take the risk? 
    • IP: At present IP rights holders in respect of goods placed in the UK market cannot prevent or control how those goods are distributed within the EU i.e. their IP rights are "exhausted" such that they cannot prevent parallel exports to the EU. This could change and accordingly distributors should be wary of contracting now to supply IP rich goods for delivery after 31st December 2020 without checking the position first.
    • Data: Businesses should consider the extent to which their operations are reliant on transfers of personal data and what risks they may be exposed to if there is no complete agreed data solution by 31st December 2020 to allow transfer of personal data between the EEA and the UK to continue, and what steps can be taken to mitigate these risks.
    ]]>
    {89BB2C6B-8223-444F-89B0-A3F79EEB10CA}https://www.rpc.co.uk/perspectives/rpc-big-deal/new-years-tax-resolutions/New year's (tax) resolutionsTue, 21 Jan 2020 11:45:00 ZRPC big dealBen RobertsA number of important tax changes are due to take effect in the early part of the year. At least one of the planned changes has proved to be short-lived, and there are question marks as to the durability of others.

    'IR35' and changes to off-payroll working rules

    The so-called 'IR35' tax legislation is designed to stop a particular form of tax avoidance whereby individuals seek to avoid paying employment taxes by supplying their services though an "intermediary" (such as a personal services company or "PSC") and instead pay themselves dividends.

    The IR35 rules, in basic terms, apply where the individual would – for tax purposes – be regarded as being "employed" by the recipient of the services (the 'client') if they had supplied their services directly, instead of through a company.

    If the IR35 rules do apply then, under current law (For private sector clients. The rules changed for the public sector in 2017):

    • payments received by the PSC are treated as employment income for UK tax purposes
    • the PSC (not the client) will have obligations to account to HMRC for employment taxes 

    From April 2020, these rules will change for "medium and large" companies in the private sector that receive services via a PSC. From April it will be the client (rather than the PSC) that:

    • is required to assess the "employment" status of the individual providing the services, and
    • is liable to pay employment taxes, if the individual/PSC is caught by the revised 'IR35' rules

    This rule change will only apply to a client if it satisfies 2 or more of the following conditions:

    • annual turnover of more than £10.2m
    • balance sheet total more than £5.1m
    • more than 50 employees

    For companies that fall below at least 2 of these thresholds ("small" companies) the rules from April 2020 will not apply. Any ongoing risk under the IR35 regime should therefore remain with the PSC.

    Earlier this month the government launched a review into the implementation of these changes, given widespread concerns as to the financial burden of the new, extended regime.

    Digital services tax (DST)

    From April 2020, a new 2% tax will be applied to the revenues of social media platforms, search engines and online marketplaces. Also caught by the new DST will be revenues from carrying on online advertising businesses related to these activities.

    The DST is apparently intended to be a 'interim' measure, to be withdrawn once an appropriate method of taxing these types of (typically multinational) businesses has been agreed at an international level.

    There had been some speculation, given the way in which the French DST has been received in Washington (badly) and given the UK's obvious desire to agree a lucrative post-Brexit trade deal with the US, that the UK's DST might be shelved or at least watered down. At the time of writing however this seems like a new tax measure likely to survive the year.

    DAC6

    Regulations implementing the EU's mandatory disclosure regime for cross-border tax planning arrangements ('DAC6') in the UK are due to take effect on 1 July 2020. The regulations have now been laid before Parliament and further HMRC guidance is awaited as to how, in practice, taxpayers and "intermediaries" (including lawyers, accountants and others) are to comply with these rules.

    The DAC6 rules have actually been in force since the end of June 2018, but reporting under the regime to a tax authority is not required before July 2020. There is now limited time left to fully get to grips with the reporting requirements under this new regime.

    Extension of corporation tax to UK property income of non-residents

    From 6 April 2020, non-UK resident companies will be charged to corporation tax (CT) (at 19%) on income (e.g. rent) from UK property. Currently, such companies are charged to income tax (at 20%) under the non-resident landlord scheme.

    This is not necessarily the 1% giveaway it seems. The change is being introduced so that, from April 2020, such UK property income will be subject to relatively new CT rules such as (i) the corporate interest deductibility restriction and (ii) restrictions on loss relief.

    Loan charge review

    The so-called "disguised remuneration" rules in Part 7A of ITEPA 2003 introduced a tax charge on employment income and disguised remuneration loans provided through third parties. These charges only applied, however, to transactions entered into from 9 December 2010.

    In 2017 a new one-off charge to tax was introduced on any remuneration provided by a third party in the form of loans from 6 April 1999. Where such a loan was still outstanding at the end of 5 April 2019, the amount of the outstanding balance was to be taxed as employment income (the "loan charge"). The deadline for filing self-assessment tax returns accounting for any loan charge due (where not accounted for by an employer via PAYE) is 31 January 2020).

    Following intense criticism of the loan charge, from MPs as well as charities and professional bodies, an independent review of the tax was carried out.

    Just before Christmas, the government published the findings of the independent review, together with the government's response. 

    The review found that the loan charge could result in "life-changing" amounts of money now being demanded from taxpayers. As the scope of the loan charge looked as far back as to 1999, the review noted that (i) the personal circumstances of affected taxpayers may have changed significantly since the loan was granted, and (ii) taxpayers may have justifiably assumed that the arrangements were no longer open to challenge.

    The government has accepted all but one of the review's recommendations. The accepted recommendations include that (i) the loan charge should not apply to pre-9 December 2010 loans, and (ii) the charge should not apply to loans made between 9 December 2010 and 5 April 2016, which were disclosed to but not acted upon by HMRC. Accordingly a number of taxpayers may now be due a refund from HMRC – a belated Christmas present!

    Planned corporation tax rate cut

    This one did not even make it to the new year. The long-planned cut to the rate of CT, from 19% to 17% and due to take effect from April 2020, was reversed by the Government before Christmas.

    The above is a summary only, and is not to be acted upon. For detailed advice, please contact me. My contact details are listed above.

    ]]>
    {3470EE82-15D8-4872-A6C5-2F5F6D360F0F}https://www.rpc.co.uk/perspectives/rpc-big-deal/equitable-life-high-court-approves-part-vii-transfer-and-distinguishes-prudential-or-rothesay/Equitable Life – High Court approves Part VII transfer, and distinguishes Prudential/RothesayMon, 06 Jan 2020 16:00:00 ZRPC big dealNeil BrownPrudential/Rothesay, in August 2019, Snowden J. rejected a transfer of annuities from Prudential to Rothesay Life even though it had been blessed by the regulators and the independent expert and even though Rothesay Life's SCR ratio was at least as good as Prudential's, if not better. Snowden J. provided detailed reasoning – but, broadly speaking, he was influenced by Rothesay Life not having the same longstanding reputation as Prudential and not having the same likelihood of parental or group financial support. Many saw this interventionist decision as making it significantly harder to obtain approval to a Part VII transfer, particularly one involving a transfer of annuities or other long-term life assurance or pensions policies.

    However, in a recent decision handed down by Zacaroli J., the High Court has distinguished Prudential/Rothesay and approved a Part VII transfer by Equitable Life to Utmost Life and Pensions Limited, notwithstanding that (i) it was a transfer of long-term life assurance and pensions business, and (ii) the transferee, like Rothesay Life, is a relatively new entrant to the market and does not have the same long-standing history as Equitable Life.  

    Zacaroli J. cited the following five grounds for distinguishing Prudential/Rothesay:

    (i) transferring policyholders would be free to switch to an alternative provider following the transfer;

    (ii) there had been no prior transfer of economic risk and reward pursuant to a reinsurance agreement;

    (iii) the transfer (which had been combined in the same court application and hearing with a scheme of arrangement which would convert with-profits policies to unit link policies and remove investment guarantees) would benefit the transferring policyholders as a whole;

    (iv) Utmost is part of a corporate group with additional capital resources available to it; and

    (v) the combined Part VII transfer and scheme of arrangement had received the "overwhelming support" of policyholders who voted on the scheme of arrangement proposal.  

    Equitable Life follows on from a decision of the High Court in October 2019 in which it also distinguished Prudential/Rothesay and approved a transfer of annuities from Canada Life to Scottish Friendly. Prudential/Rothesay has not, to date, resulted in the rejection of any Part VII transfer application.  The decision in Prudential/Rothesay is currently being appealed.

    In Equitable Life, Zacaroli J. does not pass comment on the merits of the decision in Prudential/Rothesay. However, any endorsement of the principles that judgement sought to establish is conspicuous by its absence. It is striking how quickly and easily Zacaroli J. was willing to distinguish Prudential/Rothesay.  While the Prudential/Rothesay principles will still need to be considered in any Part VII transfer, it appears that they will not present the fundamental obstacle to the approval of Part VII transfers that many had first anticipated.

    A final point to note is the high degree of complexity and innovation involved in the combined Part VII transfer and scheme of arrangement in Equitable Life, which most would agree has delivered a very favourable outcome for policyholders.  No small amount of credit is due to Equitable Life, Utmost Life and Pensions Limited and their respective advisers.
     
    ]]>
    {D0A7F39A-8505-4677-8CD1-98F3E6228C1D}https://www.rpc.co.uk/perspectives/rpc-big-deal/corporate-governance-for-large-private-companies/Corporate governance for large private companies]]>Mon, 14 Oct 2019 10:30:03 +0100RPC big dealNneka Ezekude(1) Corporate governance statement 

    Under the new code, certain large private companies that have (i) more than 2,000 employees and/ or (ii) have a turnover of more than £200 million and a balance sheet total of more than £2 billion must produce a statement of corporate governance arrangements in its directors' report in its annual accounts. The statement must be published on the company's website as soon as reasonably practicable and be kept available for a certain period of time. Within this statement, the company must state which code it has applied; how it has applied the code and if it has departed from any code selected, the respects in which it did and its reasons for doing so. 

    These companies have a choice as to which corporate governance code they apply. Their options include the UK Corporate Governance Code which is a key source of corporate governance recommendations for companies with a premium listing, the QCA's Corporate Governance Code, which was designed to help smaller and medium sized quoted companies comply with the corporate governance requirements of the AIM rules and the Wates Principles which are discussed below. 

    Some qualifying companies may choose not to apply any recognised corporate governance code for the financial year- but that does not mean that they are off the hook! These companies must explain the reasons for their decision and explain what arrangements they made for corporate governance during the previous year.

    The Wates Principles 

    The Wates Principles are a set of guiding principles for large private companies to use as a framework when making disclosures about their corporate governance arrangements. The six principles are (1) corporate purpose and leadership; (2) board composition; (3) director responsibilities; (4) opportunity and risk; (5) remuneration; and (6) stakeholder relations and engagement.
    While each principle is accompanied by a brief guidance note to help a company understand how to apply the principle in the most appropriate way, the principles are designed to be high level, flexible and ultimately a move beyond a 'box ticking' approach. Instead, they aim to acknowledge the wide variety of ownership structures amongst large private companies. Companies are not obliged to apply the Wates Principles but due to their succinct nature, they are expected to be the preferred corporate governance framework. 

    (2) Statement of engagement with employees

    This new reporting requirement shows a shift in the importance of employee engagement as a marker of good corporate governance. The provision only applies to companies that have at least two out of three of the following: a turnover of more than £36 million, a balance sheet total of more than £18 million or more than 250 employees. These companies are required to produce a statement to be included in their directors' report which details the company's engagement with employees and summarises the effect of that engagement on the principal decisions taken during the financial year. Simply put, this reporting requirement involves a two-way process – the company must provide information, encouragement and transparency while also actively listening to and taking into account its employees' feedback. Since there is no prescribed approach, we can expect a variety of different methods to fulfill this requirement based on each company's structure and culture.

    (3) Statement of engagement with suppliers, customers and others in a business relationship with the company

    Similarly to the statement of engagement with employees, the same category of companies will also be required to summarise in their directors' reports how the directors have had regard to the need to foster business relationships with suppliers, customers and others, and the effect of that regard on the principal decisions taken during the financial year. Again, the company has the flexibility to decide how it chooses to fulfill this reporting requirement. 

    (4) 'Section 172(1) statement'

    The last requirement also applies to companies that satisfy the criteria set out in point (2). The section 172(1) statement, which needs to be included in the company's strategic report and on its website, must describe how the directors have had regard to the matters set out in section 172(1)(a) to (f) of the Companies Act 2006 when generally performing their duty under section 172, i.e. the duty to promote the success of the company.  

    As previously mentioned, the code aims to mend the erosion of trust and confidence that occurred in the wake of multiple public scandals regarding the corporate governance of large private companies. Companies will need to publish their first report in 2020 at the earliest, so for now, it remains to be seen to what extent this corporate governance reform will lead to change.
    ]]>
    {41EEBC3B-1938-4DCE-809E-FFAD3B19423C}https://www.rpc.co.uk/perspectives/rpc-big-deal/football-the-beautiful-investment-game/Football, the beautiful investment game?Tue, 17 Sep 2019 11:00:00 +0100RPC big dealAt one time shares could have been purchased in the likes of Tottenham or, perhaps more surprisingly, Millwall. However, in recent years a delisting has been more likely. Shares can still be purchased in Juventus, Borussia Dortmund, Roma, and perhaps most notably Manchester United. Are these shares proving to be good investments, or the ultimate fan's folly? 

    Unlike a conventional listed company on and off field factors can affect the value of football club shares.

    On the field performance

    Measures of performance for a listed sports team can in many ways mirror those of any listed company. Unlike other businesses, performance is not limited to announcements or the latest set of accounts. It can be judged on a match by match basis which provides the share price with a high degree of volatility. A single lost game can result in a dramatic fall in value.

    When Juventus qualified for the quarter finals of the 2018/19 Champions League its share price rose by 18%. Conversely, when Juventus then lost in the next round their shares fell by the same amount.

    Ajax, the club that knocked out Juventus, left their investors thankful for their investment in the club after their shares rose by 8% as a result of thumping Real Madrid in the round of 16. Unfortunately for Ajax, their dramatic last minute loss to Tottenham in the semi-final resulted in an equally dramatic share price drop of 20%.

    Managerial Appointments 

    Manchester United provide a case study in how the mere appointment or dismissal of a manager can influence its share price, although, despite the importance of the manager and the media coverage, the share price movements were not material compared to the on field performance:

    • the hiring of Jose Mourinho, the self-appointed "Special One" in 2016 raised  hopes, but clearly not by much (and accurately it transpired), as the club's share price rose by only 1% following the official announcement; and
    • the subsequent sacking of Mourinho after a prolonged period of gradual decline (and alleged rows with players) led to a share price rise of 6%, it then rose modestly again following the appointment of former super sub Ole Gunnar Solskjaer (who had relatively little experience), although recent performances have done nothing to maintain the increase.

    Celtic experienced similar smaller fluctuations in share price when Brendan Rodgers made the decision to leave and join Premier League club Leicester City with a modest fall of 2.1%.

    Key hirings and departures are not uncommon in a non-sporting environment and a price fluctuation on this basis is no surprise. For example, earlier this year Elon Musk announced that Telsa's CFO Deepak Ahuja's was leaving and its share price fell by 4.5%. 

    However, the frequency and sudden nature of the changes in football can mean that the share price is subject to more frequent fluctuations. The League Manager's Association's "End of season manager statistics" report dated 31 May 2018 noted that 15 Premier League Managers had been dismissed in the 2017-18 season. The average tenure for all of the managers in post at the end of the same season was a mere 1.53 years. It would be unusual for a listed company to experience such employment turbulence.

    Player Signings

    Signing key players can also have a positive impact on a football club's share price. In the summer of 2018 Juventus announced the signing of the then 33 year old Ronaldo for €110 million. Although coming to the end of his career, the commercial value and certainty that Ronaldo will deliver trophies (and maybe even the coveted Champions League) for the club led to a record high share price of €1.62 in the subsequent weeks, a rise of 153%.  Conversely, when Manchester United announced the signing of Paul Pogba in 2016 its share price rose by a much lower 4%.

    Commercial Deals

    It's not just performance on the field which can affect an investment; off the field performance is also important but not predictable. Back in 2014, Manchester United and Adidas announced an official partnership, the deal being worth £750m. Over the course of a week, the share price of the club rose 5%. At the start of the 2018/19 season Manchester United announced commercial agreements with Chivas and ICICI Bank, despite starting the season in poor form, shares rose from $20.55 to a record high of $26.20 (an increase of 27%). 

    Such fluctuations are what would normally be expected in a corporate environment where new contracts could be procured and growth obtained but in the context of a football club the dual dynamic of financial performance and sporting performance cause unpredictability. On the one hand a club could be commercially thriving, whilst on the other enduring a barren spell on the pitch. The two combine to paint a rather unconventional picture.

    Summary

    The debate as to whether an investment in a football club is a matter for the head or the heart will continue.  It is certain that winning competitions, marquee transfers, and the manager merry-go-round leads to increases and decreases in share price but the result gives uncertainty.

    However, regardless of their performances on the pitch, many football clubs carry a heritage and a dedicated (merchandise-seeking and ever increasing) fan base, which would be the envy of many companies.  As the world of online streaming and in-game advertising grows, so will the commercial pull of listed football clubs and their investment appeal.

     

     

    ]]>
    {94C6A80F-C1A0-4791-B2D8-D3E35A1C26CA}https://www.rpc.co.uk/perspectives/rpc-big-deal/green-finance-enters-the-mainstream/'Green Finance' enters the mainstreamTue, 25 Jun 2019 15:51:15 +0100RPC big dealEdward ColvilleThe legal framework

    The Climate Change Act 2008 set out a framework for the UK to tackle climate change, and UK greenhouse gas emissions have fallen steadily since it was passed. On 11 June, Theresa May announced a proposal to speed up that process, by amending the Act to commit the UK to "net zero" greenhouse gas emissions by 2050. This was a move welcomed by many, including environmental groups, but implementing these changes will take input and innovation from all major industries.

    Last year, the FCA released a discussion paper entitled Climate Change and Green Finance, scrutinising the UK's transition to a greener economy and the specific FCA actions which might assist the change. More recently, the PRA published a report on the financial impact of climate change for insurers, assessing the physical climate change risk and giving some recommendations for future development. 

    In June 2019, the Treasury Committee launched an inquiry entitled Decarbonisation of the UK Economy and Green Finance into the role green finance can play in decarbonising the British economy.  The Committee will investigate both how the private sector is embracing sustainable finance and which steps regulators are taking to boost investments in green assets. The Inquiry will cover five key areas:

    1. The economic opportunity that decarbonisation presents for the UK, and the potential of the green finance sector.
    2. HM Treasury's strategy in facilitating clean growth and its response to the Committee on Climate Change's net-zero recommendations.
    3. The role of the Spending Review in facilitating net-zero emissions.
    4. The role that financial services firms are currently playing in financing the transition to net-zero.
    5. The 'green' financial product landscape and their associated regulatory environment.

    The deadline for submissions to the Treasury Committee is 26 July 2019.

    The loan market's response - Sustainability Linked Loans

    Before the launch of the Treasury Committee's inquiry, the Loan Market Association issued a paper on 'Sustainability Linked Loan Principles' (the LMA Principles). The LMA Principles represent a first step by some of Europe's largest banks to promote sustainable development by incentivising borrower companies to adopt green policies and improve their carbon footprint. 

    The broad idea behind the LMA Principles is to test borrowers on their performance against pre-agreed Sustainability Performance Targets (SPTs) during the term of their loan.  If the borrower company hits its SPTs, it can receive more favourable terms from its lenders (e.g. reductions in margins payable to the lenders).  There are four key components to the LMA Principles:

    1. understanding the relationship between specific SPTs and a borrower's (i) environmental, social and governance strategy and (ii) corporate social responsibility strategy
    2. measuring the sustainability of a borrower, either against the borrower's internal sustainability strategy or an external third party's rating criteria
    3. requiring reporting obligations on behalf of a borrower to demonstrate compliance with its SPTs
    4. encouraging independent review of a borrower's compliance with its SPTs

    The LMA Principles are voluntary guidelines, which will only be applied where appropriate on a deal-by-deal basis, but the parties to a loan may choose to include them if they are appropriate for the underlying characteristics of the transaction. 

    Comment

    The LMA Principles are not yet a market standard, and the LMA has not yet incorporated specific sustainability wording into its standard form documents.  However, press reports of substantial loans linked to the performance of sustainability targets are increasing, including:

    • Nokia's €1.5 billion loan, announced on 19 June.A key performance target in the loan is that Nokia must reduce its greenhouse emissions by 41% by 2030, failing which the margin of their facility will increase.
    • Argent's £400m development facility on behalf of the King’s Cross Central Limited Partnership from Wells Fargo, HSBC UK and Helaba to support the development of two low carbon office buildings in Kings Cross (including Facebook’s new UK headquarters).
    • Dutch agricultural commodity group Louis Dreyfus Company's renewed US$750m revolving credit facility announced on 28 May, with margin tied to targets for CO2 emissions, electricity consumption, water usage and solid waste sent to landfill.

    While these types of "positive incentive loans" may still be running behind green bonds in terms of popularity, recent political announcements and legal changes suggest their use will increase in years to come.  As banks strive to prove their own environmental credentials, and start to see the financial benefits of green finance, sustainability targets may become a standard part of commercial loans.

    ]]>
    {3021F955-B3C3-4601-AE0A-E34012989A6C}https://www.rpc.co.uk/perspectives/rpc-big-deal/national-security-and-investment/National Security and Investment – the EU's responseFri, 07 Jun 2019 14:53:17 +0100RPC big dealTim Anderson, Neil BrownBackground

    We first blogged about Huawei and UK national security in December, including a description of the UK government's proposals for new UK legislation for reviews of foreign investments on national security grounds.  Since then, Huawei has hardly been out of the headlines – just one example is the sacking of the UK's Defence Minister over an alleged leak of national security decisions in relation to Huawei supplying the UK's new 5G network.

    Without access to briefings from MI5 and MI6, it is difficult to tell how justified these national security concerns are.  However, against the backdrop of an increasingly tense US / Chinese trade war, national security controls continue to attract criticism as being a mask for partisan economic protectionism. 

    The European Union continues to walk the middle ground between the US and China.  In doing so, it has introduced a new regulation which tackles the thorny issue of control of foreign investment on security grounds, but in a way which is much less wide ranging and much less centralised than the US equivalent, CFIUS.

    New regulation

    Regulation 2019/452 (the Regulation) will come into force by the end of 2020, and will create a "framework" for cooperation between Member States and the EU Commission on foreign investments.

    The Regulation is perhaps most notable for what it does not do.  It does not mandate that all Member States must adopt national laws on screening of foreign investments.  In fact, at the time of writing a significant number of Member States have no national rules on foreign investments – for example, the UK proposals for meaningful legislation are still only at white paper stage.  Equally, it does not mandate an EU wide "super-regulator" for foreign investments – as we shall see later, the circumstances in which a foreign investment may be "reviewed" by the EU Commission will be limited, and even then any decision will be advisory only/

    Where a Member State does choose to adopt national laws for screening of foreign investments on security or public order grounds, the Regulation merely requires that those laws be transparent, not discriminatory and capable of appeal – hardly a high benchmark to meet.

    Cooperation between Member States

    What is of much more significance is that the Regulation creates a system for cooperation between different Member States in relation to review of foreign investments.  In a nutshell:

    - a Member State reviewing a foreign investment will be required to inform the Commission and all other Member States, and will be able to request comments from other Members States and the Commission;

    - a Member State will be able to send comments to, and request information from, another Member State in which a foreign investment is taking place (whether or not it is being reviewed), and any such comments must be given due consideration.

    The role of the EU Commission

    The Regulation also creates the possibility for review of foreign investments by the EU Commission.  The Commission may issue an "opinion" in a number of circumstances, such as where:

    - it considers that a foreign investment is likely to affect security or public order in more than one Member State;

    - one-third of Member States believe a foreign investment is likely to affect their security or public order;

    - any Member State requests the Commission to issue an opinion (either where the foreign investment is taking place in that Member State or in more than one Member State); or

    - the foreign investment affects projects with significant EU funding (such as the Galileo satellite navigation system) or are otherwise on a list of EU supported projects.

    However, any opinion issued by the Commission will not be binding on the relevant Member State and will be advisory in nature only.  While a Member State must take the Commission's opinion into account and provide an explanation if it does not follow that opinion, it is explicit that the "final decision" on any foreign investment remains the "sole responsibility" of the relevant Member State.

    Delays to transactions?

    It remains to be seen whether the UK will still be subject to EU law at the end of 2020.  However, if it is, then those contemplating receiving foreign investments into the UK will need to take account of both the UK national legislation (which is yet to be enacted) and this new Regulation.

    Where the UK government has decided to review a proposed transaction pursuant to the proposed new UK legislation, there is likely to be a delay if that transaction is also referred to the EU Commission.  That is because the parties will not be able to complete the transaction without the approval of the UK government, and the UK government will be obliged to wait for the opinion of the EU Commission so that it can take that opinion into account (even though it is not obliged to follow that opinion).

    In circumstances where the UK government has chosen not to review a proposed transaction but that transaction is separately referred to the EU Commission, there should be no need to wait for the EU Commission's opinion to be delivered before completing the transaction.  However, parties should be aware that the EU Commission can publish an opinion for up to 15 months after a transaction has completed.  While that opinion would be advisory only, it could prompt the UK government to take post-completion measures (which could even include unwinding the transaction).

    ]]>
    {31FD36A8-88C3-4413-9A0A-E7F81AF5068E}https://www.rpc.co.uk/perspectives/rpc-big-deal/stamp-duty-land-tax-avoidance-and-corporate-property-deals/Stamp duty land tax (SDLT) avoidance and corporate property deals – the importance of timing!Tue, 21 May 2019 16:01:31 +0100RPC big dealBen RobertsIn the Hannover[1] case the Tribunal held that the SDLT anti-avoidance rule (s.75A) applied to a series of transactions that included the SDLT-free sale of units in a Guernsey property unit trust (GPUT), even though (i) there was no tax avoidance motive, and (ii) each transaction was 'appropriately' taxed.

    The effect of the Tribunal's decision is that additional SDLT of £5.49m is payable.

    If the steps in the sale had been carried out in a different order, it would seem that s.75A would not have been triggered and this significant SDLT charge would not have arisen. Accordingly the decision serves as a timely reminder to carefully consider the nature and timing of all transactions that could be considered to take place "in connection" with a sale of UK property, even where there is no SDLT avoidance motive behind those steps.

    Structure

    A fairly typical investment ownership structure had been put in place in 2006 to acquire the UK property (Property) in question.

    The GPUT in this case was the sole limited partner in an English limited partnership (LP). Profits of the LP were allocated as to 99% to the GPUT and 1% to the LP's general partner. Units in the GPUT were held as to 99.7% by another limited partnership and 0.3% by an offshore company.

    The LP acquired the Property in 2006, and the overall UK tax effect of the structure was, in broad summary, that (1) a small amount of UK corporation tax would be payable on net rental income received by the general partner of the LP and the minority unit-holder in the GPUT, (2) net rental income allocated to partners in the partnership holding 99.7% of the GPUT units would be taxed according to their UK residence status, (3) on sale by the LP of the Property the general partner would incur a charge to UK tax on its share of any gain, but no UK tax would be payable by the GPUT[2], and (4) no UK stamp duty nor SDLT would arise on sale of the GPUT units.

    The 2011 sale to Hannover

    In early 2011 the German fund Hannover offered to buy the Property. Initially, Hannover was not aware of the existing ownership structure.  Ultimately it offered to buy the Property either (1) by way of direct acquisition of the freehold, for £133.6m or (2) by way of acquisition of the GPUT units for £138.8m. The higher price offered for the GPUT units recognised the SDLT saving that the parties believed would be available, but stipulated that post-sale the GPUT structure would be collapsed and the Property distributed to the Hannover purchasing entity.

    Hannover's structuring preferences were driven by a number of factors:

    • its preference was to acquire properties directly, so as to be more marketable to German retail investors and in order to more readily obtain approval from BaFin (the German regulatory body)

    • their supervisory board took a conservative approach and would be concerned at the prospect of acquiring the GPUT with the LP (and potential historic liabilities) sat below it

    • however, Hannover realised that pursuing an SDLT-efficient structure would enable it to table a more competitive purchase price

     Tribunal decision and comment

    At the end of the Tribunal hearing the Supreme Court released its decision in the long-running Project Blue[3] case. Although the details of the Project Blue case were somewhat different, the Supreme Court in its judgment in that case confirmed that s.75A does not require a taxpayer to have a tax avoidance motive (despite being an "anti-avoidance" provision). Rather, s.75A 'self-defines' SDLT avoidance; if the transactions put in place by the parties mean that less SDLT is payable than would have been paid (on a "notional" land transaction from the original owner to the ultimate purchaser), then s.75A is engaged.

    Following the Project Blue decision the Tribunal held that s.75A applied so that there was a "notional" land transaction from the LP to the Hannover purchasing entity. The consideration for this notional transaction was £138.8m resulting in SDLT of £5.55m (with credit given for the £55,540 already paid on the first step noted above).

    The Tribunal acknowledged that had the first step been the transfer of the GPUT units to Hannover, s.75A may well not have been engaged. It seems odd that this anti-avoidance provision can be switched on or off solely by virtue of the order in which the parties choose to carry out the acquisition steps. Whether the transfer of units is the "first" step for s.75A purposes may not always be clear, particularly where acquisition-related loans are being put in place.

    It seems highly possible that the decision will be appealed but, at least until then, this decision will add to uncertainty around SDLT on complex 'corporate wrapper' acquisitions.

    The above is a summary only, and is not to be acted upon. For detailed advice, please contact me. My contact details are listed above.



    [1] [2019] UKFTT 0262 (TC).

    [2] Under UK tax law as at the relevant time.

    [3] [2018] UKSC 30.

    ]]>
    {73757BB4-A0BA-4C12-A51A-261AC8C6B3B3}https://www.rpc.co.uk/perspectives/rpc-big-deal/more-than-you-bargained-for-the-implied-duty-of-good-faith/More than you bargained for: the implied duty of good faithFri, 26 Apr 2019 10:05:00 +0100RPC big dealDavid Wallis, Neil BrownThe traditional orthodoxy

    Outside of certain limited exceptions (such as employment and insurance contracts), English law has traditionally refused to recognise any overriding principle of good faith between contracting parties.  Instead, English law has emphasised the principles of freedom of contract, caveat emptor and contractual certainty, as well as the ethos of individualism (that parties are free to pursue their own self-interest).  A general doctrine of good faith was thought to create too much uncertainty by creating obligations that are potentially vague and subjective.

    The customary coolness of UK judges towards the concept of contractual good faith can be seen in the 1992 House of Lords decision Walford v Miles[1], where Lord Ackner described a proposed implied term to negotiate in good faith as "inherently repugnant to the adversarial position of the parties… [and] unworkable in practice as it is inherently inconsistent with the position of a negotiating party."

    However, the application of the principle of good faith is evolving.

    Express duties of good faith

    Since Walford v. Miles, the English courts have considered contracts which contain express duties to act in good faith, and have generally been willing to give effect to those express contractual obligations.

    But defining the scope of what an express obligation of good faith means is often complicated in practice.  For instance, while an express obligation of good faith will require the parties to act in a way that will allow them both to enjoy the anticipated benefits of the contract, it will not, on the other hand, require either party to give up a freely negotiated advantage embedded in the contract.  So there remains a degree of uncertainty what good faith actually means under English law.

    Implied duties of good faith

    Perhaps the most significant development in this area was the 2013 decision of Leggatt J. (as he then was) in Yam Seng Pte Ltd v International Trade Corporation Ltd[2] in which he held that a duty of good faith could be implied into a commercial contract – specifically into a "relational" contract, being a contract which involves a long term relationship (such as joint venture agreements, franchise agreements and long term distribution agreements).

    Given that Yam Seng would seem to go against the traditional orthodoxy of English law, some subsequent judicial and academic commentary (including the leading text, Chitty on Contracts) had cast doubt on whether it established a general principle of English law, or whether it is a one-off case which could be distinguished on its facts. 

    However, the recent decision of Fraser J. in Bates v Post Office (which runs to 315 pages) sets out a thorough examination of the law on this point, including cases since Yam Seng.  Fraser J. not only endorses Yam Seng, but concludes unequivocally that English law recognises a general doctrine that if a contract is a "relational" contract then it will include an implied obligation of good faith.  In doing so, Fraser J. expressly disagrees with Chitty.  In the absence of any contrary higher authority, this principle must be accepted as good law.

    What is a "relational" contract?

    The judgement in Bates v Post Office[3] sets out nine non-exhaustive characteristics of relational contracts:

    1. There are no express terms that prevent the implication of a duty of good faith.
    2. The contract is mutually intended to be long term.
    3. The parties must intend their roles be performed with integrity and fidelity to their bargain.
    4. The parties will be committed to collaborating with one another in performing the contract.
    5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
    6. Each party will place trust and confidence in the other, but of a different kind to a fiduciary relationship.
    7. The contract will involve a high-degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
    8. There may be a high degree of significant investment, or a substantial financial commitment, by one or both parties.
    9. The relationship may be exclusive.

    What does "good faith" mean?

    Fraser J.'s decision in Bates v. Post Office says the concept of good faith means more than just honesty.  It goes on to say that good faith (which is sometimes called "fair dealing") includes an obligation to "refrain from conduct which in the relevant context, would be regarded as commercially unacceptable by reasonable and honest people" and an obligation of "transparency, co-operation, and trust and confidence".  Such an abstract concept will always be highly dependent on its facts.

    Who should watch out for this?

    A relational contract will include many types of contracts, so the effects of this decision will be far reaching.  Any person or business entering into distribution agreements, franchise agreements, joint venture agreements and other long term, collaborative commercial agreements should be aware that they may now be subject to an implied duty of good faith.

    What to do in practice?

    A contracting party should decide whether it wishes a contract to be subject to a duty of good faith.  If it does not, it may be best to expressly say so in the contract to avoid any risk of the contract being held to be a relational one and such a term being implied into the contract.  Such wording could easily be added to the boilerplate wording at the end of the contract.  It may lead the counterparty to question why the first party does not wish to be bound by good faith, but this can be countered by the first party saying it does not wish to be bound by such a nebulous and uncertain concept.

    If a contracting party does wish the contract to be governed by good faith, again it may be best to expressly say so in the contract rather than rely on the uncertainty of whether the contract would be considered relational.  This has the added advantage of allowing the parties to define what good faith means, giving greater contractual certainty.


    [1]           [2019] EWHC 606 (QB)

    [2]           [2013] EWHC 111 (QB)

    [3]           [1992] 2 AC 128

    ]]>
    {EF2FE29D-6EC7-4BA7-AE8E-E18D6295D85F}https://www.rpc.co.uk/perspectives/rpc-big-deal/derivative-transactions-the-obligation-to-report/Derivative transactions – the obligation to reportThu, 25 Apr 2019 16:18:27 +0100RPC big dealEdward ColvilleThe background

    Derivative trading is often seen as a risky business, with media coverage focussing on short selling and speculative investments in futures and credit default swaps.  In practice, derivatives are an essential part of financial planning for many businesses, and are typically used as a means of spreading and diluting risk.  Many companies which receive income in different currencies due to an international presence, or which have an exposure to floating interest rates under standard banking facilities, rely on derivative transactions to protect their cash flows against changes in market conditions. 

    In the wake of the financial crisis of 2007 – 2008, regulators started to pay close attention to what had previously been an unregulated marketplace for derivative trading.  In the US, this lead to the Dodd-Frank Act and FATCA, which both have an extra-territorial impact on swap counterparties from outside the United States.  In the EU, the existing regulatory framework set out by FSMA (in the UK) and MiFID (in the EU) has been bolstered by EMIR and MiFID II.  The implications of these new regulations were extensive for those parties regularly involved in derivative trading, but also extended to those parties who enter into a handful of trades per year, such as retailers with an exposure to foreign currency risk from their overseas stores, or investors and insurance companies with longer term investment assets.  Although these less frequent traders may have sophisticated finance teams, they are often not used to the regulated environment in which investment banks work, and don't have dedicated teams who can undertake regulatory reporting.

    The obligation to report

    Since the relevant sections of EMIR came into force in February 2014, both parties to a derivative transaction have been under an obligation to report each derivative trade they make to a registered trade repository.  The report must be made no later than the working day after the trade date (or the date any trade is modified or concluded).  While investment banks with extensive internal regulatory functions may be well placed to process these reports, other parties are not, and for many companies a practice has developed of delegating their reporting obligations back to the bank that arranged the trade (or to a third party service provider).  Typically when a party (the Counterparty) negotiates an ISDA master agreement with a bank, it can also request a delegated reporting agreement to make the bank responsible for reporting both sides of the trade (although the underlying obligation to ensure that reporting takes place still falls on the Counterparty).  

    Failure to report trades can give rise to financial penalties.  For example, the FCA recently fined Goldman Sachs £34.9m for failing to report (or misreporting) 220.2 million transactions between November 2007 and March 2017. Counterparties which trade infrequently may take some comfort from the fact that penalties for failure to report are typically calculated on a "per missed report" basis, but it is clear that the FCA takes the reporting obligation seriously, and views it as critical to ensure the integrity of financial markets.

    The future

    As the derivative reporting requirements in EMIR are part of EU regulation, they have not been transposed into UK law, and in theory would cease to apply following Brexit.  However, the current regulations are part of a wider commitment on the part of G20 nations to encourage greater visibility over, and regulation of, financial markets, and it is likely that EMIR equivalent regulations will be put in place regardless of the outcome of Brexit negotiations.  The EU (Withdrawal) Act 2018 put in place a statutory framework for a UK version of EMIR, which would take effect post-Brexit if no other deal is reached.  Barring any unexpected changes in the regulatory landscape, it is likely that the current reporting requirements will remain, although the practicalities of reporting transactions may change.]]>
    {3E9DB3B9-49B6-43C7-85C5-CE8B0D87DDCB}https://www.rpc.co.uk/perspectives/rpc-big-deal/brexit-delay-prolongs-uncertainty-for-insurers/Brexit delay prolongs uncertainty for insurersFri, 12 Apr 2019 10:30:04 +0100RPC big dealNeil BrownWhile the delay of a possible hard Brexit and consequent loss of passporting rights will be met with relief by many, the uncertainty over the final outcome of Brexit (and the existence and duration of any interim arrangements) looks likely to continue for the foreseeable future.

    A number of insurers have already completed Brexit restructuring projects to guard against the risk of lost passporting rights – including Part VII transfers of existing portfolios of European business to existing or newly formed European subsidiaries.  These Part VII transfers have been endorsed by regulators and the courts as prudent precautions to take.

    However, other insurers have delayed implementing Brexit contingency plans until the political outcome of Brexit becomes clearer.  Those insurers have sought to weigh the substantial costs of carrying out a Part VII transfer and/or establishing an EU subsidiary against the risk of not being able to administer European policies after Brexit.  The desire to avoid significant unnecessary expense (which would ultimately be borne by policyholders) is entirely understandable - especially when you consider that as long ago as March 2018 both the EU and UK stated that transitional measures would be put in place until at least December 2020, by which point the future trading relationship would have been agreed.  Those earlier statements can no longer be relied on, but it remains a possibility that passporting rights, or another form of mutual market access arrangement, will be retained as part of any future trade relationship between the UK and the EU.  It also remains a possibility that Brexit will never take effect.

    Yet the possibility of a hard Brexit also remains a possibility, not least if there is a change of leadership within the Conservative party.  And however large or small that possibility, the consequence for UK insurers would be of fundamental significance – the risk of no longer being able to administer existing European policies legally or write new European risks.

    To add further confusion to the mix, EIOPA issued guidance in February encouraging national legislators to look kindly upon UK insurers running-off portfolios of European insurance business (effectively reversing some of EIOPA's previous statements on this point).  This has led to legislation and regulatory announcements in many EU member states providing that UK insurers may continue to service existing insurance business in their jurisdiction for a transitional period.

    For example, the Republic of Ireland (the European economy which many believe has the most to lose from a cliff-edge Brexit) has prepared wide ranging legislation intended to soften the effects of any hard Brexit.  Part of that legislation provides for UK insurers to be able to continue to administer run-off policies for a period of three years following Brexit day.  However, well-meaning as this is, it is a small part of a very large package of legislation, and is somewhat lacking in detail.  Some uncertainty exists as to how it would be applied in practice – for example, would amendments to existing policy terms be allowed?

    So the decision whether to implement a Brexit restructuring project involves the consideration of a myriad of legal, political and operational factors.  Yet in the absence of any certainty, we can expect many insurers to proceed with expensive Brexit projects.  Recent court decisions have confirmed that Brexit Part VII transfers can still be justified notwithstanding the implementation of national transitional legislation.  One of the interesting and unintended side effects of Brexit is that it has spawned a great deal of case law and judicial commentary on Part VII transfers, an area of law which had not previously developed at a lightning pace.  However, such legal niceties will be of little comfort to insurers who continue to find themselves in a state of Brexit uncertainty.

    ]]>
    {3098C147-FBC0-44BB-93FD-B3098D43E74B}https://www.rpc.co.uk/perspectives/rpc-big-deal/uk-property-big-tax-changes-for-non-uk-residents/UK property – big tax changes for non-UK residentsFri, 05 Apr 2019 16:32:49 +0100RPC big dealBen RobertsWhy the change?

    Non-residents have for some time had an advantage over UK residents when it comes to the taxation of UK commercial real estate, due to the fact that unlike most other major jurisdictions the UK does not exercise its full taxing rights as afforded by international tax rules.

    The government now attempts to 'level the playing field'.

    What's changing?

    From 6 April 2019, a single UK tax regime will apply to sales of both residential and commercial UK real estate by non-residents, comprising

    1. a new UK tax charge for gains on "direct" sales of UK real estate; and
    2. a new UK tax charge for gains on "indirect disposals" of UK "property rich" interests. This will bring within the scope of UK tax disposals by non-residents of certain companies, partnerships and unit trusts holding UK real estate.

    The applicable rate of UK tax will be 19%[1] for non-resident companies caught by the new rules and, for non-resident individuals and others, up to 20% (in the case of commercial property) and up to 28% (in the case of residential property).

    The new tax charge(s) will in each case only apply to gains arising since 6 April 2019 (i.e. property held at that date will be rebased to its current market value).

    "Indirect disposals"

    One aspect of the new regime that has been the subject of much debate is that, from 6 April, a tax charge will arise on gains on disposals by non-residents of interests in entities that themselves hold UK real estate. This so-called "indirect disposal" charge will only apply to disposals of interests in "property rich" entities. This will be the case if:

    • at the time of disposal, at least 75% of the value of the interest (e.g. shares) sold is derived from UK land. This test is applied to the gross-asset value of the entity in question, using the market value of the assets at the time of disposal; and
    • the non-resident making the disposal holds at least a 25% interest in the entity.

    There will be a "trading" exemption so that (broadly) a disposal of an otherwise "property rich" entity by a non-resident will not be caught by the new tax charge if the UK land held by the entity is used in the course of a trade during the 12 months prior to the disposal, and immediately after. This is likely to benefit hotels, care homes and retailers.

    Collective investment vehicles (CIVs)

    This "indirect disposal" aspect of the new UK tax regime has caused much concern for the UK property industry as, without bespoke rules for CIVs, the new "indirect disposal" tax charge would have jeopardised a basic premise of UK real estate investment structuring; to ensure that from a tax perspective the investor is placed in no worse a position than if they had invested directly.

    The position for CIVs was the last to be finalised. For "property rich" CIVs, the position is:

    • Default position: an offshore CIV which is not a company, nor a partnership (e.g. a JPUT), is treated as a company for the purposes of the new UK tax charge. Rights of investors in such an offshore CIV are treated, for these purposes, as shares. The effect of this default treatment is that the offshore CIV will, from 6 April 2019, be subject to UK tax on any gains from direct sales of UK real estate.

       

    • Transparency election: an offshore CIV that is not a partnership (e.g. a JPUT or a company) may make an election to be treated as a partnership for the purposes of the new rules. Any direct disposal of UK real estate by the CIV in this case would be taxed in the hands of the non-resident investors.

       

    • Exemption election: an election for exemption from UK tax on direct disposals of UK real estate by both (i) an offshore CIV and (ii) by companies held by the offshore CIV, can be made by (1) offshore CIVs that are companies, and (2) non-CIV companies that are wholly-owned by CIVs that are partnerships.

    Regardless of the making of any election, non-resident investors in offshore CIVs will be caught by the new "indirect disposal" UK tax charge on disposal of their CIV interests if the CIV is "property rich". For disposals of interests in CIVs there is no 25% ownership threshold.

    The above is a summary only, and is not to be acted upon. For detailed advice, please contact me. My contact details are listed above.



     

    [1] Falling to 17% from April 2020.

    ]]>
    {CF2D8CC7-84E0-4E98-8FA3-40856A0D37EF}https://www.rpc.co.uk/perspectives/rpc-big-deal/a-licence-to-kill-a-licence/A licence to kill... a licenceMon, 11 Mar 2019 19:35:34 ZRPC big dealTim AndersonChange of control clauses

    Most of you reading this article will be well aware of the need to review "change of control" clauses in the key agreements of a target company in an M&A context – however, change of control clauses can sometimes be overlooked in other contexts, such as when auditing key suppliers.

    For those not familiar, a change of control clause can take many forms, but at its most basic, it is a clause which provides that one party has the right to terminate the relevant agreement in the event that the other party is subject to a change in shareholder.

    In the supplier auditing context, those conducting due diligence on a key supplier tend to spend their time on seemingly more important matters such as the ability to provide the service, bribery/corruption concerns, compliance, etc., rather than reviewing the details of the supplier's own important legal contracts…but let the real world example in the next paragraph serve as a warning to those conducting such an audit on a key supplier!

    A real world example…and a warning!

    Our corporate team has recently been involved in an exercise whereby a major tech company was auditing one of its key suppliers (our client) with a view to discovering any risk factors in regards to that supplier's own supply chain – the particular major tech company often, at short notice, puts in large orders with the key supplier and therefore wanted to reassure itself that nothing in that supplier's own supply chain would prevent such orders being fulfilled.

    This is of course a very considered approach to managing ones supply chain; however, a key element was missed in diligence – namely a detailed review of the supplier's IP licence agreements (including to see whether such agreements contained any change of control clauses).

    In the context of the tech market where such companies change hands at breakneck speed, a key supplier losing the right (following a change in control) to a particular third party IP licence to build and sell its product can be cause serious difficulties not just for the supplier, but also for its end customer – especially in situations where finding a substitute product is difficult (if not impossible!), either in the short term or the long term. Of course, the relevant licensor may agree not to terminate the IP licence following a change of control of the supplier, but the licensor's agreement not to do so may (and likely will) be coupled with a request for increased royalties under the terms of the IP licence agreement – which is clearly far from ideal.

    In our above example, if such a key supplier were ever subject to a change of control, the individuals appointed to audit the supply chain are very likely to fall out of favour with management! And in any event, if and when customers wake up to auditing supplier third party IP agreements in greater detail, such a clause within a key IP licence agreement will put the relevant supplier at a clear competitive disadvantage. 

    The point here…

    …is that tech companies (and their lawyers) need to keep in mind the commercial reality of what they are trying to achieve, whether in an M&A context or just general auditing of their supply chain. Reviewing change of control clauses in suppliers' licence agreements is an important task for all customers; but companies licencing their products should also consider whether including a change of control clause (or a least an absolute change of control/termination right) in a licence agreement with a customer in the first place works on a commercial or practical level.

    Although there are clearly risks for the licensor in not including such a clause in its third party licence, the consequences for the licensee can often be far more significant. In some scenarios, one sentence could make all the difference: "subject to the reasonable consent of the licensor (not to be unreasonably withheld or delayed)"!

    ]]>
    {C7A22634-53E4-448A-AA73-8982D6A6371B}https://www.rpc.co.uk/perspectives/rpc-big-deal/part-three-practical-implications-of-side-letters-and-mfn-clauses-for-fund-investors-and-managers/Part Three: Five practical implications of side letters and most favoured nations clauses for fund investors and managersFri, 15 Feb 2019 16:07:09 ZRPC big deal

    If the MFN clause is to be contained in an investor's individual side letter it is crucial that, as far as possible, the drafting of such MFN is consistent with the drafting in other side letters. Inconsistencies in ‘tiering’ or other carve-outs create a complex and confused picture regarding which investors are entitled to have sight of which side letters, and whether they are eligible to elect to benefit from such terms. Accordingly, sponsors should take a robust approach to negotiating the drafting of the MFN clause, even when investors wish to use their ‘pro-forma’ side letter provisions.

     

    (1) Visibility of MFNs

    Visibility of side letter entitlements of other investors and the ability to elect to benefit from them is a crucial part of the modern private equity fund raising process. Investments are often dependent upon the success an investor has in the MFN negotiation process.

    MFN clauses were initially drafted as a simple provision by which investors were entitled to the disclosure of side letter terms negotiated by other investors with the fund sponsor, and permitted an investor to elect to receive the benefit of any of those terms they wished to take the benefit of. Until relatively recently, the MFN clause was regarded as the ‘self-help’ remedy in an unregulated market reserved for investors that could help themselves to all, or substantially all, of the same rights as other investors. This investor friendly environment did not last for long.

     

    ‘Unregulated’ private equity funds are characterised by extremely flexible structures and can accommodate most commercially negotiated agreements. Therefore, as investors have become more sophisticated and demanding in the fund raising process, so the MFN has evolved from simply entitling investors to disclosure and possible election of preferential terms granted to other investors, to a complex and highly negotiated clause which many see as the key to a successful investment negotiation with a fund's sponsor.

     

    (2) Project management

    Since there can be many investors in some of the largest private equity funds and, dependent upon the scope of their MFN entitlements, because many of those investors are entitled to 'cherry pick' preferential terms, co-ordinating the side letter disclosure and subsequent election process can be challenging for a sponsor to manage.

    Sponsors should commence capital raisings with a clear side letter strategy and consider which investors are likely to expect side letters and MFN rights, the scope of such MFN clauses and whether carve-outs can be included in the MFN. A sensible approach is to appoint a lead individual to take responsibility for the side letter election process and liaise closely with legal counsel to ensure consistency of approach.

     

    (3) Costs

    During the fundraising process, private equity sponsors should expect to receive several requests for side letter accommodations, particularly from the larger institutional investors. Negotiation of side letters is often a laborious process and can be time consuming—even to the extent of delaying closing—and can increase legal and administrative costs significantly.

    Should the investor require a legal opinion from the sponsor on the enforceability of its side letter, additional time and costs will be incurred.

     

    (4) Standardised language and MFN carve-outs

    Standardising side letter language can ease monitoring and compliance burdens on the sponsor's administrative team and also limit the number of clauses that are available for side letter election. Standard MFN carve-outs will significantly ease the burden of the MFN election process.

     

    (5) Require affirmative action for MFN election

    Investors wishing to exercise their MFN rights should be required to acknowledge their MFN elections in writing within a specified number of business days (commonly 30 business days). This approach enables investors’ flexibility to tailor elections to their particular circumstances, lessens the chance of conflicting side letter entitlements and facilitates a workable structure for ensuring compliance with side letter elections.

    ]]>
    {D0AAFC3C-C713-46F2-9F59-549E5A24EF3A}https://www.rpc.co.uk/perspectives/rpc-big-deal/part-two-side-letters-and-fundraising/Part Two: Side letters and fundraisingMon, 28 Jan 2019 11:37:04 ZRPC big dealFundraising and the negotiation of the limited partnership agreement (LPA) and, in an increasing majority of cases, side letters, are central to the establishment of a private equity fund. The LPA is the sponsor's starting position but investors carry such influence that the negotiation is increasingly driven by large institutional investors seeking to amend the terms of the investment either by negotiating the LPA or, more commonly, by seeking to enter into a separate side letter agreement with the fund's sponsor. Therefore, side letters play a key role for sponsors in the private equity fund raising process.

    Side letter provisions modify the underlying fund documentation (most commonly a LPA) to the extent that they apply to the parties to the side letter.

    A common example is a side letter provision reducing the management fee payable by an investor or entitling an investor to a seat on the fund's advisory board. However, the degree of customisation is evolving and the demands of large investors are ever increasing.

    MFN provisions enable investors to see the preferential entitlements of other investors and pick and choose which of those terms they want to include in their own side letter as well as find additional provisions to request in future private equity fund investments.

    Side letters are becoming increasingly tailored to the needs of the global investor base deploying capital into private equity funds and often contain provisions relating to:

    • preferential co-investment opportunities in possible future investments, i.e. provisions permitting a fund’s investor to invest directly in an entity that is also backed by the fund with some form of preference attached, (e.g. the offer of a co-investment to a specific investor in priority to other fund investors, including a co-investment ratchet mechanism based on such investor's commitment to the fund);
    • management fee discounts,( i.e. a discount on the fee for running/administering the fund);

    • 'opt-outs' or excuse rights for certain specified investments such as pork products or tobacco, (i.e. provisions which permit a fund’s investors to opt-out/be excused from providing the relevant fund with funding for specific types of investment);

    • consultation or even veto rights in respect to certain amendments to the fund documentation, (e.g. the LPA, investment management agreement etc.); and

    • a stake in the management company or in a carry vehicle.

    The extent to which investors can negotiate such side letter clauses will often be directly proportionate to the amount of capital deployed and the timing of such investment.

    Having looked at both the high level overview (part one of this series) and some slightly greater detailed issues (in this second part), we will consider some practical implications of side letters and MFNs for investors and managers in the final part of this series.

    In part three of this series we will consider the practical implications of side letters and MFN clauses for investors and fund managers.


    ]]>
    {7039CACA-009B-4E46-8188-4904BFDE424E}https://www.rpc.co.uk/perspectives/rpc-big-deal/part-one-overview-of-side-letters-and-mfns-when-investing-in-private-equity-funds/Part One: Overview of side letters & MFNs when investing in private equity funds Mon, 14 Jan 2019 13:00:00 ZRPC big dealSide letters and MFN clauses play a key role in the commercial negotiations of an investment in a modern private equity fund. In this first of a three part series, we look at a high level overview of side letters and MFNs in the private equity space.

    If an investor can negotiate a side letter with the fund's sponsor, such side letter entitles that specific investor to preferential terms for their investment in the fund (e.g. a reduced management fee or co-investment rights).

    The MFN clause entitles an investor to have visibility of side letter entitlements of other investors in the fund and, in certain circumstances, allows such investor to elect to benefit from those entitlements.

    The MFN clause and its interaction with investor side letters and the fund documentation can result in the disclosure of investors' side letter entitlements to other investors and even the right to take the benefit of preferential terms negotiated by other investors. However, MFN clauses can also lead to a range of issues surrounding lack of transparency for investors.

    Further, MFN clauses can lead to increased bureaucracy, administration and legal costs for the sponsor, i.e. typically the fund’s general partner or investment manager who establishes and promotes the fund, in negotiating and implementing complex and increasingly lengthy MFN clauses and side letters. Such side letter negotiations and the MFN election process can even delay fund closings.

    MFN clauses have become a 'must have' for large institutional investors and fund sponsors should expect to receive lengthy side letter requests (invariably containing MFN clauses) and take the necessary steps to accommodate such requests as far as they deem commercially prudent.

    Most private equity funds now structure the MFN drafting to include carve outs and tiering premised on the size of an investor's commitment to the fund. The effect is to deny disclosure of the terms of any other side letter to an investor that does not commit at least as much as the investor who entered into the side letter in question.

    There are a number of administrative and practical steps that a sponsor can take to ensure the smooth implementation of MFN clauses and a well operating side letter election process which we will discuss in the third part of this series.

     

    In part two of this series we will consider side letters in further detail. ]]>
    {EE40004D-FFF2-4FB1-9D75-849EE23E227E}https://www.rpc.co.uk/perspectives/rpc-big-deal/new-regulations-to-permit-assignment-of-receivables-under-commercial-contracts-now-in-force/New regulations to permit assignment of receivables under commercial contracts now in forceFri, 11 Jan 2019 10:07:21 ZRPC big dealEdward ColvilleDesigned to encourage access for small business to alternative forms of finance following the banking crisis of 2008, the new Regulations seek to prohibit any clause in a contract which restricts the assignment of receivables.  The Regulations are particularly relevant for suppliers under commercial contracts, who might seek to improve their cash flow by raising finance through invoice discounting or factoring.  However, they have a general application for all contracts under which a small or medium sized entity supplies goods, services or intangible assets to another business (subject to exemptions which apply to international contracts, contracts for the supply of financial services, energy, land etc, and to share/asset purchase contracts and operating leases).  The Regulations also do not apply to contracts to supply consumers, or where the supplier is a large business or a special purpose vehicle.  More details on the background to the Regulations can be found in an earlier RPC blog here.

     

    The Regulations have been seen as a welcome move by finance providers, and in theory should improve the access of small businesses to different forms of finance.  Receivables under contracts can be a key asset of small businesses supplying goods and services, and an increased ability to assign these receivables by way of security should improve their ability to secure funding.  Under the Regulations, any term in a relevant contract that prohibits or imposes a condition or other restriction on assignment will automatically have no effect in relation to the assignment of receivables under that contract.

     

    A key concern for businesses during the consultation phase had been the effect that the Regulations will have on confidentiality clauses (which could be seen as restricting assignment if they prevent the supplier from disclosing details of the underlying contract).  This concern has not been addressed in the Regulations – confidentiality clauses will have no effect for this purpose where they contain any terms which prevent a third party from determining the validity or value of a receivable or the ability of an assignee to enforce it.

     

    The new Regulations do not apply retrospectively, but will need to be taken into account when preparing any new supply contract in 2019.

     

    ]]>
    {5DE3D153-31F9-44E8-B62B-4A0703F5E03C}https://www.rpc.co.uk/perspectives/rpc-big-deal/white-paper-on-national-security-and-investment/White Paper on National Security and InvestmentMon, 17 Dec 2018 11:55:51 ZRPC big dealNeil Brown, Charles BuckworthWhat would the proposals capture?

    Whilst the proposals are still only at white paper stage, there is no doubt that that the legislation would be very broad reaching.  The government would have the power to intervene in relation to any "trigger event" which gives rise to "national security concerns".

    Trigger events would not just be corporate transactions in the traditional sense, but could include more or less anything, including the granting of IP licences, the entry into of outsourcing arrangements or even the appointment of a director to a board. 

    There will be no "safe harbours" and no thresholds based on turnover or deal value or other economic criteria.

    What are "national security concerns"?

    The white paper does not attempt to give definitions, but sets out a series of often overlapping principles.  The white paper is accompanied by a draft "statement of policy intent".  This statement of policy intent will require approval by Parliament at least every five years, and is intended to provide guidance on the types of risk the government is seeking to address.

    It is almost impossible to extrapolate a single and coherent statement of what "national security concerns" is intended to mean.  However, the white paper and draft statement of policy intent set out a number of examples which show that the concept is intended to be extremely broad.  For example:

    - acquiring control over a business providing data-hosting servers to a defence contractor

    - acquiring the IP used by a third party service provider to run data servers for an energy company

    - acquiring land that is adjacent to national infrastructure sites

    - acquiring a business that designs computer hardware components found in electrical goods that could be remotely accessed to undermine UK national security (e.g. listening devices in TVs and computers)

    - acquiring deep sea cables which supply energy to the UK

    What is the "acquirer risk"?

    The "acquirer risk" is stated to be a relevant consideration.  Whilst this is perhaps the key point of the entire proposals, it is the one with the least explanation or detail.

    The draft statement of policy intent refers to "hostile states", "hostile parties" and "hostile actors".  No list of hostile states is provided, although the limited press commentary to date identifies China is the main target of the proposals.  Hostile actors do not always identify themselves as clearly as Dr Evil from the Austin Powers franchise, so it is not certain how civilian parties (who do not have access to state intelligent services) are supposed to know who they can and cannot deal with.

    The white paper also makes the perhaps provocative statement that "foreign states and foreign nationals are comparatively more likely to pose a risk than UK-based or British acquirers". 

    What are the powers?

    Whilst the government will encourage voluntary notifications, the government will also have power to "call in" any trigger event where it has a "reasonable suspicion" it "may give rise to a national security risk". 

    Of encouragement is the statement that it would be possible to engage with the government at an early stage for informal guidance on whether a notification would be appropriate.

    If the government decides that a full assessment is required, the government would have up to 75 business days to make that assessment (with the "clock stopped" while parties respond to any information requests made by the government").

    The government could impose conditions or outright block proposed trigger events.  The government could also unwind trigger events which had already taken place.

    Government decisions would be subject to appeal to the High Court on principles similar to judicial review.

    What are the sanctions?

    Failure to comply with conditions imposed by the government would be a criminal offence liable to unlimited fines and up to five years imprisonment.

    In addition, civil financial penalties could be imposed of up to 10% of worldwide turnover for a business (or for an individual, the greater of 10% of total income or £500k).  These civil penalties are proposed as being more "nimble" than criminal prosecution. 

    Who needs to think about this?

    Given the very broad ranging scope of "trigger events" and "national security interests", these proposals will be not just be relevant to those engaged in traditional military or defence industries.  In fact, the rules will need to be considered by those engaging in activities of an entirely civilian character. 

    For example:

    - suppliers to national infrastructure facilities such as hospitals, airports and power plants

    - those researching tech and digital developments for civilian use, but which could be acquired and turned to military use

    - the providers of services on which everyday economic activity depends (such as digital banking or payment systems)

    - anybody proposing to transact with a Chinese entity

    What happens next?

    Consultation on the white paper has now closed.  The next step is for the government to present a bill to Parliament.  Once this has been done, the timing for implementation should become clearer.

    ]]>
    {22E14120-08FD-4126-9306-DF90EB96C9CF}https://www.rpc.co.uk/perspectives/rpc-big-deal/a-signature-move-in-the-right-direction/A Signature Move in the Right Direction? Thu, 13 Dec 2018 14:08:44 ZRPC big dealWhat constitutes an electronic signature?

    An exhaustive definition of "electronic signature" doesn’t exist; but the Paper does contain a brief summary of what the Law Commission believes to be the main types of electronic signatures that contractual parties may seek to use:

    • a scanned "wet ink" signature page which is then circulated by email

    • manuscript signing on screen (such as through a stylus or fingernail to inscribe an image approximating a usual signature)

    • "I accept" or "I agree" buttons

    • Signing using a password or PIN

    • Typing a name or initials on a document as a way of signing

    • Biometrics (e.g. fingerprint or facial recognition)

    • "Digital" signatures – which could cover numerous forms of signature, but is intended to mean a type of electronic signature produced by using asymmetric or public key cryptography

    What is the current law?

    As most law students learn on day 1 at Law School, an agreement can be binding on relevant parties if, among other requirements, there is an offer, an acceptance of that offer, some type of consideration (e.g. a cash payment) and the parties intend to be legally bound – even a trip to the local shop to buy a newspaper will form a type of "contract" under English law.

    Therefore, it is not necessary for parties to ensure that any agreement they wish to make is in fact in writing (…but in a commercial setting, it is clearly very advisable to do so!).

    Historically, the Statute of Frauds Act 1677 forms the basis of much of the current debate and states that certain kinds of contracts must be in writing and signed (principally to avoid fraud). Whilst the law has moved on significantly since 1677, this piece of legislation is still valid law and its modern day application is considered by the Law Commission in its Paper – who provisionally conclude that in its view an electronic signature is capable of complying with existing law.

    The European Union has also provided its support for electronic signatures as a result of its eIDAS Regulation[1], stating that "an electronic signature should not be denied legal effect on the grounds that it is in an electronic form".

    In further support, a number of England and Wales Court of Appeal decisions have concluded that electronic signatures can satisfy the requirements for documents to be executed as long as there is a clear intention of the parties to be legally bound by it.

    Ok…why is there a concern then?

    There are still some misgivings among corporates (as well as the legal profession) in respect of which types of electronic signatures are "valid" for the execution of written contracts under English law; and while the signing and circulation of scanned "wet ink" signature pages by email is now fairly common[2], the use of "digital" signatures (as described above) is not.

    A lack of clarity (even if only perceived) in the law is evidently discouraging parties from using the various forms of electronic signature that are currently available... and in our fast-paced, technology-driven market, this nervousness amongst contractual parties is unhelpful (which is something the Law Commission wishes to address).

    As a practical example, we very recently worked with a seller who wished to execute the sale and purchase agreement on his iPad by signing with his finger. Notwithstanding that this clearly meets the relevant contractual formation criteria, the buyer's lawyer had reservations about accepting such a signature and therefore requested a traditional hard-copy, "wet-ink", signature page.

    So, can I use electronic signatures or not?

    Although it would largely depend on the form of the electronic signature, if you want to use an electronic signature to sign a simple legal agreement, in most cases it is probably fine to do so as long as that signature is a clear indication by the parties that they wish to be legally bound to the relevant agreement.

    The story is much more complicated for agreements that need to be in the form of a Deed, as the key formality requirement of a Deed is that a separate individual actually witnesses the signatory signing the relevant Deed. The question of whether this could be done remotely (e.g. over "Skype") is debated by the Law Commission but, for the time being, this is probably a step too far based on the current interpretation of the law.

    As a result, the Law Commission is quite right in seeking views on the current law and its constraints. Since issuing its Consultation Paper, both the Law Society and the City of London Law Society have responded to the paper and, in general, they agree that an electronic signature is capable of satisfying a requirement for a signature under the current law where there is an intention to authenticate the document. However, there are still some reservations in relation to Deeds and the need to physically witness the signature itself.

    In our view, it is only a matter of time before the flexibility of our common law catches up with modern ways of doing business.

     



    [1] Note: the Regulation (EU) no 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transaction in the internal market.

    [2] Note: The Law Society has released practical guidance relating to such virtual signings and closings where signatures pages are exchanged by email: https://www.lawsociety.org.uk/support-services/advice/practice-notes/execution-of-documents-by-virtual-means/

    ]]>
    {BD3B8932-4744-4D55-B42E-86D771F30BB9}https://www.rpc.co.uk/perspectives/rpc-big-deal/huawei-and-uk-national-security/Huawei and UK National Security - A new technology cold war?
    ]]>
    Tue, 11 Dec 2018 17:49:33 ZRPC big dealNeil Brown, Charles BuckworthSo where does the UK stand in what some are describing as the dawn of a new technology cold war?   Last week, BT (the owner of mobile network EE) announced that it would bar Huawei's equipment from the core of its upcoming 5G network, and would be removing Huawei from the core of its existing 3G and 4G networks.  Yet so far, no action has been taken by the UK government. Why?

    White paper on UK national security and investment

    The reason may be that the UK government currently lacks the legal power to make a greater intervention.  In fact, the UK government is currently consulting on proposed new legislation to give the UK government far greater powers to intervene in "transactions" (in the broadest possible sense) on national security grounds.  Such legislation would replace the existing limited powers under the Enterprise Act 2002.

    Why is new legislation being proposed?

    The proposals are being made in response to:

    - advances in technology (and dependence on technology) meaning there are a far greater number of ways in which the national security and infrastructure of the UK could be attacked or undermined.  Last week's breakdown on the O2 network is a timely reminder of just how dependent on technology our modern society has become.  Imagine how much damage could be caused, for example, by a concerted attack on all IT infrastructure of the NHS;

    - the evolution of geopolitics, globalisation and changes to those who might be considered "hostile" to UK national security.

    If the UK were to implement the white paper proposals, it would be following the lead of other countries such as Germany, Japan and Australia, each of whom have adopted similar rules recently.  The US has had the far reaching Committee on Foreign Investment in the United States (CFIUS) regime since the days of Ronald Reagan, and it has been significantly strengthened under Donald Trump.

    Whilst many will see the white paper proposals as sensible and pragmatic, there will be others who will be critical of far reaching powers which are open to abuse (whether on grounds of economic protectionism or otherwise).  The white paper has attracted relatively little press comment, perhaps owing to Brexit dominating the current scrutiny of legislative reform.  

    The white paper only uses the word "China" once.  However, what little press comment there has been has firmly identified China is the main target of the proposals.  The current tensions in relation to Huawei only serve to underline this point.

    In our next blog, to be published next week, we will explain more of the detail of the white paper's proposals.  As we will see, this will be relevant to a much wider group of businesses and people than might have been expected.]]>
    {B79572B2-0712-4639-A571-A67D0CDDB992}https://www.rpc.co.uk/perspectives/rpc-big-deal/budget-2018-10-key-business-tax-takeaways/Budget 2018 – 10 key business tax takeawaysThu, 08 Nov 2018 16:00:00 ZRPC big dealBen Roberts 

    1. Entrepreneurs' Relief (1): from April 2019, the minimum holding period for ER purposes will be increased to 2 years (from 1 year, currently). 

      Entrepreneurs' Relief (2): from 29 October 2018, 2 new conditions must be met for a shareholder seeking ER. In addition to holding at least 5% of ordinary share capital and voting rights, the shareholder must be beneficially entitled to at least 5% of the company’s distributable profits, and 5% of its assets available for distribution to "equity holders" in a winding up.

      The Government's stated view is that the effect of these 2 changes will be to introduce ER requirements that are "more characteristic of entrepreneurial activity".

       

    2. Digital Services Tax: from April 2020, a new 2% digital services tax will be introduced on UK revenues from search engines, social media platforms and online marketplaces. The exact scope of the new DST is to be determined by way of consultation but note that (i) the new UK DST will not be introduced if an "international solution" to digital taxation is achieved before April 2020; (ii) the new UK DST is intended to hit the "tech giants" not start-ups (there is to be a £25m UK revenue threshold, and a separate £500m global revenue threshold); and (iii) the Government says it expects the new DST to raise £1.5bn over 4 years.

       

    3. Intangible fixed assets de-grouping charge: from 7 November 2018, no IP de-grouping charge will arise in connection with sales of companies that qualify for the UK's "substantial shareholding exemption".

       

    4. Stamp duty: a new market value rule (so that stamp duty is charged on the higher of actual consideration and market value of the shares) will apply for share transfers executed on or after 29 October 2018 where "listed" shares are transferred to a company and the transferor is connected with the transferee company (but not in such cases where stamp duty group relief is available).

       

    5. VAT and "offshore looping" by insurance intermediaries: from March 2019, a form of VAT avoidance by insurance intermediaries is to be closed down. This, currently, involves insurance intermediary companies entering into arrangements with non-EU entities to resupply or 'loop' services back to UK consumers. This arrangement takes advantage of current UK VAT rules which allow the insurance intermediary to recover its associated input VAT.

       

    6. Insolvency: from April 2020, HMRC will regain 'preferred creditor' status in respect of VAT, PAYE income tax, employee NICs and construction industry scheme (CIS) deductions (i.e. taxes the insolvent business collected on behalf of other taxpayers).

       

    7. 'IR35' rules for private sector employers: from April 2020, private sector employers will be subject to the same 'IR35' rules as public sector employers are currently subject to. The IR35 rules apply (potentially) to payments made to contractors supplying services through personal services companies. Accordingly, from April 2020 it will be the responsibility of the private sector employer (and not the personal services company) to assess whether payments to the company should be subject to tax/NICs (and to account for the same to HMRC). Only large- and medium-sized employers will be affected by this change.

       

    8. Termination payments and NICs: the introduction of employer NICs on termination payments over £30k has been pushed back another year (to April 2020).

       

    9. SDLT: possible SDLT surcharge of 1% for non-residents purchasing residential property in England and Northern Ireland (to be consulted on in January 2019).

       

    10. Gains realised by non-residents on UK property sales: from April 2019 non-residents selling UK property will be subject to UK tax. It has now been confirmed that collective investment schemes (CISs) and alternative investment funds (AIFs) will be treated as companies for the purposes of these new rules (unless partnerships). If the CIS or AIF is "property rich" (ie at least 75% of gross assets derived from UK land) then a non-resident disposing of an interest in the CIS or AIF will be subject to the new "indirect disposal" tax charge from April 2019.
    ]]>
    {738F08F5-39C8-430E-B6CF-1814E09A8921}https://www.rpc.co.uk/perspectives/rpc-big-deal/something-out-of-the-ordinary-share-capital/Something out of the ordinary (share capital)Mon, 05 Nov 2018 12:22:00 ZRPC big dealBen RobertsA number of key UK tax provisions turn, in part, upon the meaning of "ordinary share capital".

    For example, in order to access the 10% CGT rate available under the UK's 'entrepreneurs' relief' rules, it is necessary amongst other things for a seller of a trading company/group to have held, for a period of at least 1 year, at least 5% of the company's "ordinary share capital".

    The statutory definition of "ordinary share capital" is "all the company's issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company's profits".

    Last month the Chartered Institute of Taxation published a table setting out HMRC's views on a number of different types of share capital, each with differing dividend rights. All of the examples provided by HMRC are ones which they have come across in practice. Although described as HMRC's "initial" views, subject to further review, and potentially to be treated differently in "avoidance" cases, it would appear that:

    HMRC consider the following as falling within "ordinary share capital"

    • A share with no dividend rights. Such shares were the subject of discussion in the case of HMRC v McQuillan [2017], in which the Upper Tribunal held that a right to a dividend of zero was not a right to anything at all. Such shares therefore do not have a right to a dividend at a "fixed rate".

    • A fixed rate preference share with a zero coupon.

    • A fixed rate of 10% non-cumulative (as in some years no dividend will be paid, so there is no "fixed rate". The return is dependent on the results of the business, so more like equity than debt).

    • A fixed rate of 10% non-cumulative, but dividend can only be paid if Regulator (e.g. FCA) authorises. It is irrelevant that a third party is involved. The right is not fixed as the dividend rights are non-cumulative.

    • A preference share with a right to "tiered" dividends (as the rate of dividend is not fixed).

    • A share which has a right to the greater of a specified sum or the dividend paid in respect of another class of shares (again, as the rate of the dividend is not fixed).

    • A fixed rate preference share, but the holders receive a payment above the par issue price based on the figure for reserves when redeemed, or when the company is sold, or placed in liquidation (although the holder is entitled to a fixed rate of return, the entitlement to a payment above par is an "other right to share in the company's profits"). Note that HMRC flag this as being particularly "finely balanced", and therefore subject to further review.

    • A fixed rate preference share, but the holders receive a further dividend payment were certain events to occur (usually unlikely except in exceptional circumstances e.g. breach of banking covenants). Again, although the holder is entitled to a fixed rate of return, there exists an "other right to share in the company's profits.

    • A preference share with 2 alternate fixed rates, the rate used depending upon certain events during the year (e.g. level of profits).

    • LIBOR plus a fixed percentage (LIBOR of course fluctuates daily).

    HMRC consider the following as NOT falling within "ordinary share capital"

    • A fixed rate preference share with a zero coupon of 0.000001% (i.e. negligible).

    • A fixed rate of 10% cumulative.

    • A preference share where the coupon compounds over time (if the rate is fixed and cumulative). Note that HMRC flag this as being particularly "finely balanced", and therefore subject to further review.

    • A preference share where a rate of interest is added if the dividend is unpaid (if the rate is fixed and cumulative). Note that HMRC flag this as being particularly "finely balanced", and therefore subject to further review.

    • A fixed rate of 10% cumulative, but dividend can only be paid if Regulator (e.g. FCA) authorises.

    It remains to be seen whether HMRC's views find their way into published, official guidance, and whether they are further refined in light of further HMRC experience/reflection.

    For now, however, this should provide some further certainty as to what HMRC, at least, would consider to be ordinary (or 'extraordinary'!) share capital.

    ]]>
    {F06EDFCE-3809-4A8C-AFAB-1D7587FA2AF7}https://www.rpc.co.uk/perspectives/rpc-big-deal/tech-talent-to-purchase-or-to-hire-that-is-the-question/Tech talent: To purchase or to hire…that is the questionFri, 02 Nov 2018 11:53:00 ZRPC big dealCompared with most other industries, when a potential purchaser is considering the prospect of acquiring a tech business (and considering its M&A strategy), the tech talent can sometimes be the most important asset that it wishes to acquire; often leaving the business itself as a secondary after-thought.

    Consequently, there can oftentimes be a question mark over whether it is more advantageous to hire the talent or acquire the business as a whole.

    Here are a few thoughts which may need to be considered in this context…

    Acquiring talent rather than shares

    1) Labour over liabilities

    One of the key benefits of acquiring talent directly rather than the shares is avoiding the liabilities associated with acquiring a target company. Although the doctrine of the "corporate veil" is still very much alive in the UK, prospective purchasers would be wise to weigh up the desire for talent against the accrued liabilities of a tech start-up/growth company (which are often highly leveraged in the development stage). 

    2) Cost

    It goes without saying, but the "cost" of the acquisition is an essential consideration. It will almost always be cheaper to acquire the talent rather than a target company (especially when the parties get into conversations about net asset value, multiples, cash free/debt free calculations, etc...). However, this must be balanced with any headhunting fees and/or a "golden hello" that the talent may be pushing for.

    3) Integration & motivation

    The importance of the post-completion integration phase is not to be underestimated and can be expensive in terms of time and cost. Integrating an individual or team into your business, rather than an entire subsidiary (or a target group!), can help to alleviate this issue altogether. Added to this, who wouldn’t love to be headhunted for a new role? Especially if it comes with a healthy increase in remuneration! It’s a natural motivator for any employee; kick-starting the drive towards the purchaser's acquisition objectives – rather than the uncertainty of being part of an acquired business.

    Acquiring shares rather than talent

    1) Where’s the value? 

    Purchasers should be very clear in their mind as to what it is that they really want to acquire. The talent may be irresistible and plug a skills gap; however, quite often it is the technology belonging to the target company that holds the real value rather than the clever employee who developed it. By acquiring the employee, you have the "potential" for greatness but not the technology that caught the purchaser's eye in the first place. In addition, can you be sure that the talent that the purchaser is seeking to acquire is the correct individual(s)/team(s) that provide the real value? It's also worth bearing in mind what the talent is looking to get out of the transfer – do they see a great opportunity to develop at your company or just a way to leverage how "in-demand" they are in order to boost their remuneration in the short-term? 

    2) Restrictive covenants

    Debates around the enforceability of restricted covenants should not be dismissed lightly. Any well-advised tech company will ensure that the restrictive covenants in their employment agreements are appropriate and, above all, enforceable; and include provisions which provide that any intellectual property developed by the employee (especially code, software, algorithms, etc.) exclusively belong to the employer. It is not unheard of for a disgruntled ex-employer to try to prove it has suffered a loss (and pursue damages) as a result of an employee moving employers and/or taking "IP" with them; which is a risk to the new employer and employee alike.

    3) Brand

    A strong brand can hold as much value as the technology itself; consider whether Uber would actually be able to compete with the likes of Deliveroo and Foodpanda if they had branded as "Eats" or "U Eats" rather than "Uber Eats"? Acquiring the talent behind the technology can sometimes be only half the story and lead you to start from scratch rather than leverage an already successful proposition.

    Ultimately, the decision between hiring or purchasing hinges on one question; what do you want to acquire? This may seem like an obvious point, but it can sometimes (and oftentimes does) take a back-seat when the deal team is running full-speed at an acquisition.

    ]]>
    {F585F025-53E2-49E7-B08C-DDD55DD8EAEC}https://www.rpc.co.uk/perspectives/rpc-big-deal/drafting-you-do-the-maths/Drafting: you do the mathsThu, 01 Nov 2018 12:22:19 ZRPC big dealNeil BrownInterpretive Mathematics?

    Take the salutary example of Chartbrook v. Persimmon[1], a case as relevant today as when it was first handed down in 2009.  Here, a payment obligation was defined as:

     "23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less Costs and Incentives".

    The parties took two very different interpretations of this clause, resulting in a difference of several million pounds.  Whilst one of those interpretations appeared to be commercially reasonable, and the other not, the courts will interpret contracts literally, and rectification for "mistake" is difficult to obtain.  So it was necessary to litigate all the way to the House of Lords (now the Supreme Court) just to establish what this clause actually meant.

    Had the clause been drafted using a simple formula, the ambiguity would have been apparent immediately.  You don't need to be Rachel Riley to understand that the following two formulae produce very different results:

    (i) Price = 23.4% x (A – B – C)

    (ii) Price = [23.4% x (A – C)] – B

    where:

    A = price achieved for each Residential Unit

    B = the Minimum Guaranteed Residential Unit Value

    C = the Costs and Expenses.

    Formula for success

    The objectives of legal drafting are clarity, simplicity and the avoidance of ambiguity.   In short, good drafting should minimise the risk of future dispute.

    So be wary of contracts which rely wholly on long jumbles of words.  If a picture can tell a thousand words, a formula can tell ten thousand.

    Worked examples

    The other notable point from Chartbrook was the absence of a worked example.  Had the parties produced a worked example, the differences in interpretation would have been flushed out and clarified before the contract was signed – and years of expensive litigation would have been avoided.

    You do the maths?

    Whilst some contracts will contain mathematical concepts of such complexity that they can only be fully understood by other specialists (such as actuaries), a great many contracts contain relatively simple mathematical ideas.

    Many lawyers "don't do maths".  Yet, given the importance of these clauses, the lawyers need to work with the business and other relevant advisers (such as corporate finance) to ensure that anything which is drafted is accurate and sufficiently clear.  Anything else just doesn't add up.

    [1] [2009] UKHL 38.

    ]]>
    {F996BA94-0FAF-4EFA-8B21-10BAF38D6A84}https://www.rpc.co.uk/perspectives/rpc-big-deal/managing-expectations-key-considerations-for-early-stage-startups-and-their-investors/Managing expectations: key considerations for early stage start-ups and their investorsTue, 30 Oct 2018 12:22:00 ZRPC big dealIn the first of a series of blogs aimed at demystifying common provisions found in venture capital term sheets (with the hope of accelerating the negotiation process between investors and founders), Peter Sugden discusses "good leaver / bad leaver" provisions in early-stage venture capital investment.

    What are good leaver / bad leaver provisions?

    Good leaver / bad leaver provisions are clauses (usually found in the Articles of Association of a company) which oblige an employee or founder shareholder to transfer his/her shares if he/she leaves the company (ie. becomes a "leaver"). The price at which that transfer takes place will generally be determined by whether the leaver is a "good leaver" or a "bad leaver".

    Why are they commonly found in venture capital investments?

    Early-stage investment is fundamentally based around good ideas and the people who have those ideas. Founders and key employees are often the key assets underpinning a decision by a venture capitalist to invest. As a result, a key part of venture capital investment is ensuring that the company's executive team are properly incentivised to develop the business following a fundraise – this will help to align the interests of the founders with the interests of the investors.  Bill T. Gross (the founder of the US start-up studio Idealab) said in his 2015 TED talk: "If you take a group of people with the right equity incentives and organise them in a start up, you can unlock human potential in a way never before possible."  The promotion of good behaviour in an executive team through equity incentives is an important part of a venture capital investor's strategy. Good leaver / bad leaver provisions play a key role in this by:

    • incentivising executives to stay with (or, frankly, deterring them from leaving) a business by requiring them to transfer their equity in the company if they leave;
    • preventing leavers from profiting from the capital growth of a business to which they are no longer contributing; and 
    • providing a pool of shares (ie. the shares transferred from the leaver) to allow the business to recruit a replacement for the leaver and incentivise that individual properly.

    Who decides if someone is a good leaver or a bad leaver?

    This is a key point of negotiation between the founders and the investors and will be based on the reason for which the founder/employee leaves the business.  Given that good leaver / bad leaver provisions seek to encourage good behaviour amongst an executive team, in general a "good leaver" will be a leaver who leaves the business for reasons beyond their control, while a "bad leaver" will be a leaver who leaves the business voluntarily or because they have done something which is wrong or damaging to the business.  Common examples of each are:
     

    Good leaver

    Bad leaver

    Death

    Dismissal for cause, including:

    • gross misconduct
    • negligence
    • dishonesty
    • breach of employment agreement
    • committing a criminal offence

    Permanent incapacity (either personally or of a dependent)

    Retirement (at normal retirement age)

    Redundancy

    Voluntary resignation (save in circumstances which constitute wrongful or constructive dismissal)

    Wrongful or constructive dismissal

    Any reason for leaving which does not result in the leaver being a "good leaver"

     

    It is increasingly common in venture capital transactions for a less binary distinction to be drawn between being a "good" and a "bad" leaver by also having a concept of an "intermediate leaver" – this often applies to scenarios such as voluntary resignation after an agreed period of service or unfair dismissal, where the "bad" leaver tag is sometimes seen as less appropriate.

    Why does it matter if someone is a good leaver or a bad leaver?

    The distinction between being a good leaver and a bad leaver is significant as it will determine the price to be paid for the transfer of the employee/founder shareholder's shares. The most common position is for:

    • a good leaver to be paid fair market value for his/her shares; and
    • a bad leaver to be paid the lower of fair market value and nominal value for his/her shares.

    Where the concept of an intermediate leaver is used, a portion of the leaver's shares are often purchased for fair market value, with the remainder being purchased at the lower of fair market value and nominal value.

    Fair market value in these cases will usually be a price agreed between the leaver and the board of directors of the company, or – if they can't agree – as determined by an expert using a pre-agreed valuation methodology.

    A recent high-profile example (albeit outside of the venture capital context) of the value of being treated as a good leaver was the departure of Martin Sorrell from the advertising giant WPP.  It was widely reported in the press that Mr Sorrell left WPP as a "good leaver" which entitled him to an exit package of around £15m, a fact that led to shareholder revolt at the company's most recent Annual General Meeting.

    Some points of practice for investors and founders

    Good leaver / bad leaver provisions extend their roots into some deeply personal elements of a founder's personal life – retirement, health and plans for where life might take him/her generally.  It is key that founders engage with the possible personal reasons why they might leave a business at an early stage in a fundraise. For example, if a founder wishes to retire early within a few years of the fundraise or simply has other interests that he/she wishes to pursue in the medium- or long-term then he/she might be able to agree with the investor that his/her voluntary resignation after a pre-agreed period of time should not be a bad leaver event (and should instead be a good or intermediate leaver event). 

    Investors, meanwhile, need to ensure that the good leaver / bad leaver provisions which they negotiate with founders are enforceable when needed.  One complicating factor here is the general principle of English law that penalty clauses are unenforceable.  There is, therefore, an important line to tread when drafting bad leaver provisions to ensure that they do not represent a punitive remedy against a leaver (on the grounds that shares are commonly required to be transferred at significantly less than market value in this scenario).  Recent case law suggests that being able to demonstrate that founders received independent legal advice prior to entering into an investment with a venture capital investor is important to show that bad leaver provisions are proportionate and in the legitimate interests of the company and investor, both of which are key considerations in determining enforceability.  Alarm bells should ring if founders don't propose to appoint appropriate advisers. ]]>