Danielle Kidd & Alasdair Wood 3 May 2012 - - PowerPoint PPT Presentation
Danielle Kidd & Alasdair Wood 3 May 2012 Scope of update: Dividends Impact of "Enviroco" case Meaning of "reasonable
3 May 2012
Dividends Impact of "Enviroco" case Meaning of "reasonable endeavours" / "best endeavours" Directors duties Bribery Act 2010 Companies House second filing service / updated stock transfer form Sensitive company names / name swaps under "same name" regime Earn outs
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to 853 "Distribution" defined in s.829 CA06 as: "every description of distribution of a company's assets to its members, whether in cash or otherwise" except:
bonus issue redemption/purchase of own shares out of capital / unrealised profit reduction of share capital distribution on winding-up
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preference No distributions can be made except out of "profits available for the purpose" ie accumulated realised profits (to extent not distributed/capitalised) less accumulated realised losses (s.830(2) CA06) Accumulated figures – no need for profit in relevant year ie look back Distributions are made by individual companies not groups "Profit"/"loss" include revenue and capital profits and losses
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De facto directors and unlawful dividends
Progress Property Company Ltd v Moorgarth Group Ltd [2011] 1 WLR 1
Unlawful distributions (transfer at undervalue) Objective or subjective approach?
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S736(1) of the Companies Act 1985 (restated in section 1159(1) CA06 provides that: "a company is a "subsidiary" of another company, its "holding company", if that other company: (a) holds a majority of the voting rights in it; or (b) is a member of it and has the right to appoint or remove a majority of its board of directors; or (c) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it;
that other company."
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transferring legal title to shares by way of security, so that the company retains its status as a "subsidiary" and remains part of the wider "group".
For example: "In this agreement, any reference to "subsidiary" and "holding company" shall have the meanings set out in section 1159 CA 2006, but for the purposes of section 1159 (1) CA06 a company shall be treated as a member of another company if any shares in that other company are registered in the name of (i) a person by way of security (where the company has provided the security) or (ii) a person as nominee for the company."
CA06
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In performing the obligation, the Obligor* can weigh up its
considerations The Obligor is not required to sacrifice its own commercial interests when satisfying the obligation. For example, if it is in the Obligor's commercial interests to delay performance it may do so
"Best Endeavours" – most onerous
The Obligor needs to pursue all avenues in satisfying the
* "Obligor" means the relevant party who must perform the obligation
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The Court will try to uphold the endeavours clause where the contract is already being performed Clause upheld despite fact that performance would cause financial loss to the Obligor
Best approach: consider what steps the relevant party should be required to take and make express provision for this in the contract
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EDI Central Ltd v National Car Parks Ltd [2010] CSOH 141 When drafting, specify the following:
steps that the party must take to reach the desired outcome any time limit for the obligation whether expenditure is to be incurred and if so how much whether the party has to take any legal action how the parties will communicate with each other
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There is no complete definition of who a director is CA06 states that a director includes "any person occupying the position of director, by …...whatever name called" The Act does not attempt a more detailed definition because it is important to ensure that the term is applied to anybody who exercises real power within the company, particularly in relation to decision making What is important is the role the directors play
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Title is irrelevant Executive, non-executive, de facto, shadow, alternate, nominee….. UK law does not differentiate between different types of directors
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CA06 ss 170 - 177 Codified directors' duties avoid conflict
s.175 not to accept benefits from 3rd parties s.176 declare interests in existing transactions and proposed transactions s.177 act within powers s.171 exercise independent judgement s.173 promote success
s.172 exercise reasonable care, skill & diligence s.174
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The CA06 provides that compliance with the general duties does not remove the need for approval under the relevant provisions dealing with transactions which require members' approval Hawkes & Cuddy [2009] EWCA Civ 291
Section 172 CA06 "duty to promote the success of a company"
Lexi Holdings v Luqman [2010] EWCA Civ 1116: obligation to take appropriate steps Brandeaux Advisers v Chadwick [2011] EWHC 58 (QB): duty to report wrongdoing Safeway Stores v Twigger [2010] EWCA Civ 1472: directors not personally liable for wrongdoing Towers v Premier Waste Management Ltd [2011] EWCA Civ 923: irrelevant whether company suffers actual loss GHLM Trading Ltd v Maroo & Others [2012] EWHC 61 (Ch): directors sold stock to pay for own personal loan
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Some practical advice for clients considering directorships:
Consider whether they have sufficient time to devote to the role Develop and refresh skills / knowledge Continue receiving relevant training Keep detailed records Obtain independent professional advice whenever they judge it necessary
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A strict liability corporate offence Only defence is if the organisation puts in place "adequate procedures" Some practical guidance on the six principles set out by the Government:
1. Proportionate procedures 2. Top level commitment 3. Risk assessment 4. Due diligence 5. Communication 6. Monitoring and review
and the sectors and jurisdictions within which it operates
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Key provisions:
Liability for "associated persons" Extra territorial scope General offences updated New bribery of a foreign public official offence Indirect bribery outlawed Severe penalties Senior officer liability Facilitation payments and corporate hospitality
SFO: targeting dividends to recover proceeds of crime
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)*+ ,#*
Submit second, amended form along with:
Form RP04 (Companies) Form LLRP04 (LLPs)
Original inaccurate form cannot be removed Stock transfer form – additional stamp duty exemption certificate
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Change to Companies House policy regarding use of words "International" and "Group" in name Companies wishing to use these words must now meet the relevant conditions at the time of registration Ability for a company to provide written confirmation that it intends to meet the relevant criteria within three months of registration is no longer available
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"Holdings" – three month confirmation rule remains available "International" - company has to amend name post incorporation "Group" - must be a minimum of two companies in group at time of incorporation
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Problems arise when there is another non-group company with the same "root" name as a client's name Example:
Assume your client has the name Red Limited and wishes to change that to Red UK Limited. It is not part of a group. If there is any company already on the register with the 'root' "Red" followed only by words that for the purposes of the Company and Business Names (Miscellaneous Provisions) Regulations 2009 are to be disregarded in determining whether one name is the "same" as another eg Red Exports Limited or Red Company Limited (but not, say, Red London Exports or Red Trading Limited), the name change will not be permitted. Even if Red Limited is part of group (which has registered the names Red Exports Limited and Red Company Limited), the group exemption will not apply and the name change will not be permitted if there is a non-group company already on the register with the 'root' "Red" followed only by other disregarded words. Use "Company Name Availability Search" on Companies House website.
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Purchase price payable on future financial performance Earn-out arrangements vary widely but usually linked to vendor's continuing involvement How an earn-out is calculated varies Settlement can be in various forms eg cash, consideration shares or loan notes
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Short financial track record Vendors vital for on-going success Purchase price achieved on perceived future earning potential "Mismatch" in parties' respective valuations
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Purchaser Target company's future financial performance Cash flow Incentivise vendors if they are being retained Vendor Help secure ongoing employment (if desired) Realise full value of the business/higher price:
purchaser may give discount if no earn-out vendors may benefit from synergies post-completion
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Difficulties to negotiate – potential for fall out Price uncertainty (but cap can be included) Fluctuations in profitability post-completion – can be difficult to exclude Clean break for both parties prevented Inherent tensions:
vendor = short term -v- purchaser = long term
Purchaser may be prevented from fully integrating target into group due to earn-out restrictions Tax and stamp duty issues are more complicated Need to balance both parties' expectations Porton Capital Technology Funds and Others v 3M UK Holdings Ltd and Another, 2011 EWHC 2895 (Comm)
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3 May 2012