Archive for June, 2015
Currently in the UK, companies are permitted to appoint directors who are corporate entities rather than individuals/natural persons. However, under the Companies Act 2006 all companies must have at least one director who is a natural person at all times.
Only just over one per cent. of UK companies use corporate directors. There are several reasons why it may be attractive or beneficial for companies to appoint corporate directors, such as administrative flexibility and efficiency. A corporate director could remain constant without the need to effect frequent appointments and resignations of individual directors. A parent company may also wish to directly control how its subsidiaries are run and may do so by it, or another group company, being appointed as a director of the subsidiaries.
However, the use of corporate directors can be, and sometimes is, open to misuse. For example, complex group ownership and control structures are often created, perhaps using shareholders and corporate directors in foreign jurisdictions as well. This makes it hard for others (including tax and other regulatory authorities) to ascertain the beneficial ownership of the UK company in question and also the individuals that control it. Such opaque structures are sometimes used for tax avoidance or tax evasion or to avoid liability or compliance with directors’ duties which would otherwise fall on the individual directors.
The use of corporate directors is not permitted in some other jurisdictions such as Germany, Australia, Switzerland and in some US states.
Against the backdrop of recent international impetus and commitment to promote greater transparency by companies, in July 2013 the UK’s Department for Business, Innovation & Skills (“BIS”) published a discussion paper which, amongst other things, proposed a prohibition on UK companies being able to appoint corporate directors. The discussion paper invited opinions on the proposals. The paper is available here.
BIS published the Government’s response to the discussion paper in April 2014 (“Response Paper”) under which it affirmed its intention to prohibit UK companies from appointing corporate directors. As such, the Small Business, Enterprise and Employment Act 2015 received Royal Assent on 26 March 2015 and the ban on corporate directors will come into force in October 2015.
The Response Paper noted that there was a broad consensus (which included views from non-governmental organisations, law enforcement agencies and other business organisations) that corporate directors should be prohibited in most instances. However, there were also arguments that there should be some exceptions to the ban in situations where there is a low risk of illicit activity or where the company in question operates under a more regulated framework (i.e. if its shares are listed on a public market).
In November 2014 BIS published a further discussion paper under which it put forward the proposed exceptions to a complete ban on corporate directors. This paper is available here. The possible exceptions include: companies which form part of a large group; public companies whose shares are listed on a regulated or prescribed market; other large non-listed public companies; certain large private companies; and companies in regulated sectors (i.e. charities or pension trustees). The period for responses to this paper has now ended but on 26 March 2015 BIS published a questionnaire seeking views on whether the Secretary of State should make a principles based exception to the ban on corporate directors. A copy of the questionnaire is available here. The consultation closes on 27 April 2015.
It is the Government’s intention to implement any exceptions and the scope of those exceptions in secondary legislation at the same time the general prohibition on corporate directors comes into force towards the end of 2015. Once the legislation comes into force, the ban on corporate directors will apply immediately to all new appointments and will apply to existing appointments 12 months later, so there is a grace period in which companies must remove or replace corporate directors with natural persons (unless any exemptions apply). Breach of the new rules will be a criminal offence.
There are no immediate plans by the Government to apply the ban on corporate directors to limited liability partnerships (“LLPs”) given that there is less evidence to show abuse carried out by LLPs through the use of corporate members. However, this position will be monitored by the Government after the new rules for companies come into force.
The case of Sugar Hut Group & Others v A J Insurance  EWHC 3775 (Comm) considered the measure of business interruption losses to which the claimants were entitled following a serious fire at a well-known nightclub – the Sugar Hut Club in Brentwood, Essex (the “Club”). The case highlights the importance of full disclosure before inception of an insurance policy and gives an indication of how the courts will calculate business interruption losses and in particular the proper assessment of the overall loss of turnover.
Following a fire on 13 September 2009, the Club was effectively unusable for a period of some 49 weeks until it eventually reopened on 25 August 2010. Very shortly after the Club reopened, it started to feature in a well-known TV show – The Only Way is Essex which significantly increased its national profile. The Court referred to this as the ‘TOWIE’ effect.
The Sugar Hut Group (“Sugar Hut”) initially issued proceedings against its insurers. The judge dismissed Sugar Hut’s claims on the grounds that there had been non-disclosure before inception of the insurance policy as well as breaches of warranties given to the insurers. Sugar Hut then commenced proceedings against its insurance broker A J Insurance (“AJI”) arguing that the reasons the judge had dismissed Sugar Hut’s claims against its insurers arose from AJI’s negligence/breach of duty to Sugar Hut. The claim against AJI was based on the amount Sugar Hut would have expected to recover from its insurers but for AJI’s negligence/breach of duty. AJI conceded liability before trial but the quantum of damage remained in dispute, in particular, how to calculate the overall loss of turnover during the period immediately following the fire until the Club reopened in August 2010.
The Court was presented with contrasting views from the forensic accountants instructed by the parties. The accountant instructed by Sugar Hut calculated the loss of turnover to be £2,626,769, which was based on an average between two perspectives: (1) an extrapolation of the Club’s turnover in the period before the fire which took into account the increase in turnover in the period before the fire and applied an uplift to calculate the projected lost turnover during the period immediately after the fire until the Club reopened; and (2) the actual turnover achieved after the Club re-opened for business.
The accountant instructed by AJI, presented a substantially lower figure of £1,883,311 by concluding that the Club’s turnover during the period immediately after the fire would have increased only by the relatively modest increase in the Consumer Price Index (“CPI”). He chose to ignore the actual turnover achieved after the Club re-opened for business.
The Court accepted that the figures showed an increase in turnover in the period before the fire and agreed to apply an uplift to these figures to reach a projected turnover in the equivalent weeks following the fire. However, it refused to take into account the turnover actually achieved after the Club re-opened. The Club was refurbished following the fire which meant that it was effectively a new club and the ‘TOWIE’ effect resulted in a substantial increase in the total number of visitors to the Club after it appeared on TV.
There are two main points to take away from this case:
- in calculating the loss of turnover where a business has been interrupted, it is now unlikely that the courts will take into account the turnover after the business re-opens where substantial improvements have been made in the rebuilding process; and
- it is difficult to assess business interruption losses and in particular the loss of turnover. There is a clear need to adduce convincing evidence to prove losses. It is also important to make full disclosure before the inception of any insurance policy and to comply with the warranties given.
The Department for Business, Innovation & Skills has published new regulations amending the share buyback process under the Companies Act 2006, in an attempt to clarify the previous amendments of 2013. With these latest changes having come into force with effect from 6 April 2015, we take a look at the regime’s evolution over recent years and the likely effects of the changes.
Background: The 2006 Act
Part 18 of the Companies Act 2006 (“Part 18”) sets out the procedure for share buybacks by a limited company. It imposes certain requirements in order to make a buyback lawful, relating to shareholder approval, timing of payment and how the purchased shares are treated. The most common reasons why a company may wish to buy back its shares are to return surplus cash to shareholders, increase net assets per share, enhance share liquidity, or provide shareholders with a way to exit the company.
When the original Part 18 came into force, it broadly followed the equivalent provisions under the Companies Act 1985, although importantly it removed the need for express authorisation for a buyback to be included in a company’s articles of association.
The Nuttall Review and 2013 amendments
In 2012 the Nuttall Review of Employee Ownership found that the regime was still overly burdensome and recommended several deregulatory changes to Part 18. These were aimed at removing barriers to the creation and uptake of employee ownership arrangements. Companies were found to be reluctant for their employees to receive shares, due to procedural requirements and fear of an inability to recover the shares later.
Regulations were produced which came into force in 2013 in response to the Nuttall Review, making the following amendments to the process:
- an ordinary resolution was now sufficient to approve a buyback, rather than a special resolution (as previously required);
- private and unlisted companies were allowed to hold treasury shares, rather than having to cancel repurchased shares immediately; and
- in addition to buybacks out of distributable reserves, private companies were permitted to make small buybacks of shares out of cash, using the lower of £15,000 and 5% of their share capital in any financial year (but only where the company’s articles expressly permitted or where a special resolution was passed) (the “de minimis exemption”);
- where a buyback was in relation to an employees’ share scheme (as defined in the 2006 Act), companies:
- were able to authorise multiple share buybacks in advance without the need for a buyback agreement;
- were able to finance buybacks out of capital with only the need for a solvency statement and special resolution; and
- were able to finance buybacks in instalments.
The amendments simplified the procedure and brought increased flexibility by providing an easier route to divesting members of their shares, with less administrative burden. Notably, some of the most radical changes only related to employee share schemes, meaning that the effect of the provisions may be limited where, for instance, a departing manager does not hold his shares pursuant to such a scheme. This may therefore encourage companies to opt for an employee share scheme rather than the more traditional approach of employee benefit trusts, which can be expensive and cause administrative headaches themselves (for example they can lead to delays in complying with bank KYC requests).
The 2015 regulations have kept substantive changes to a minimum, with the main focus on clarifications to the 2013 amendments. The de minimis exemption introduced in 2013 is now stated as applying in respect of “the lower of £15,000 or the nominal value of 5% of the fully paid share capital calculated at the beginning of the financial year”. The regulations also clarify the accounting treatment of the de minimis buybacks (which should be the same as buybacks out of capital) and remove the ability to hold shares in treasury if bought back under the de minimis exemption.
It remains to be seen how popular these amendments will prove in encouraging employee share ownership, although the 2015 regulations will help both companies and advisers get to grips with the potential of the new regime. The increased flexibility is certainly welcome and private companies adopting new articles of association should consider including an express provision in respect of the de minimis exemption, to provide them with more choice when dealing with departing minority shareholders.
To see the new regulations, follow the link:
The government has confirmed its intention to carry out a full post-implementation review of the 2015 regulations (as amended) in 2016.
The recent decision of the High Court in Dunbar Assets v BCP Premier Ltd  EWHC 10 (Ch) once again highlights the need to ensure that proceedings are served in accordance with the Civil Procedure Rules (“CPR”).
The Claimant was a banking institution providing lending to organisations and individuals looking for investment for developments. The Defendant was a construction management company which provided advice on proposed lending opportunities.
The Claimant issued a Claim Form on 18 December 2013 seeking damages in excess of £300,000 for breach of contract and other claims and on 3 March 2014 sent a copy of the sealed Claim Form by fax to the Defendant.
On 18 March 2014 the Claimant’s solicitors notified the Defendant’s solicitors that the Particulars of Claim would be served on 17 April 2014 (which was the last date on which the Claim Form issued on 18 December 2013 could, in ordinary course, be served). In response, the Defendant’s solicitors observed that the Claim Form appeared to have been served by fax on 3 March 2014 which would mean that the Particulars of Claim should be served prior to 17 April 2014. The Claimant’s solicitors responded saying that the fax on 3 March 2014 was for ‘information purposes only’ and that the Claim Form had not in fact yet been served.
The Claimant’s solicitors then sought an extension of time for service of the Claim Form and the Particulars of Claim and the Defendant’s solicitors agreed an extension of time for service of the Particulars but refused an extension of time for service of the Claim Form. In order to formalise this and other matters the parties agreed to a Court Order (“Consent Order”) which provided that the Claimant serve its Claim Form by 4pm on 3 April 2014.
Instead of serving the Claim Form on 3 April 2014 in accordance with the CPR, the Claimant’s solicitors emailed a copy of it to the Defendant’s solicitors. The Defendant’s solicitors subsequently responded pointing out that the Claimant had not complied with the Consent Order and that it was out of time for service of the Claim Form.
On 24 April 2014 the Claimant made an application for an extension of time to serve the Claim Form and/or relief from sanctions and/or that service by email should be permitted as good service pursuant to CPR Rule 6.15 (which makes provision for service by alternative means). The application came before a Deputy Master on 2 May 2014 and an Order was made that the emailing of the Claim Form should be permitted as good service. The Defendant appealed the Deputy Master’s decision and the matter came before the Court in December 2014.
The Court held that there had been no good reason for ordering that the Claimant’s emailing a copy of the Claim Form to the Defendant should be permitted as good service.
It was common ground that service by email was not good service and it was evident from the language of Rule 6.15 that an application for an order permitting service by an alternative method or place would only succeed if it appeared to the Court that there was a good reason to authorise such alternative service and the Court decided to exercise its discretion in favour of permitting it. This was a case where the Claimant had provided no explanation whatsoever for not serving the Claim Form properly. The Claimant had agreed that this is what it would do and had consented to an order requiring it to do it and there had been ample opportunity for it to do it. The Deputy Master had also referred to an absence of prejudice to the Defendant, a matter which he accepted was not enough on its own. However, there was arguably enormous prejudice to the Defendant if the order was made, because it would render a limitation defence unavailable. Accordingly, the Deputy Master had been wrong to conclude that on the facts of the case there was a good reason to make an order under Rule 6.15. The Court would not therefore exercise its discretion in favour of granting the order as the Claimant had not explained why the Claim Form was not served properly in accordance with the CPR and it would prejudice the Defendant by denying it a limitation defence.
The important point to note from this case is that it is vital to ensure that the procedural rules in relation to time limits and methods of service are adhered to when starting a claim. A failure to comply strictly with these rules may mean that a claim has not been properly served and, where there are limitation issues at play, may mean that the opportunity to bring a claim could be missed entirely.
Below are some recent examples of the firm’s international work.
The Corporate Department continues to advise on a number of international transactions. This includes:
- acting on the acquisition of certain IP assets from a Maltese company;
- advising the sellers of a UK solar energy provider which held the rights to build the largest capacity solar farm in the UK on its sale to a Canadian group;
- advising the seller of a UK solar energy development to another Canadian group; and
- the restructuring of a UK-based software developer in conjunction with an investment into its US parent company.
Our international banking team has been appointed to sit on the panel of advisers for a Spanish public bank to advise on aspects of English law.
We have assisted a US borrower in the natural resource sector in its negotiations with a UK lending institution on the terms of its credit agreement.
We have also assisted on the extension and renewal of a secured term and revolving facility from the UK branch of a US bank for a London based mobile gaming company with a US parent.
MH Dispute Resolution has been:
- advising lawyers in Germany in connection with the intended financing of the purchase of Chinese cargo ships;
- advising an internet search optimisation specialist in a claim against a Guernsey-based supplier of products via the internet;
- advising South American government entities in connection with issues relating to the purported service on them of High Court proceedings; and
- advising a Luxembourg investment house in connection with a hotel scheme.
The MH Real Estate Department has continued to act for:
- a Malaysian Bank based in Kuala Lumpur, on its ongoing secured lending transactions in the UK; and
- a Saudi Arabian bank based in Riyadh, on its secured lending transactions in the UK.
The MH Employment Department has advised:
- a South American embassy on a particular employment matter; and
- a management shareholder on his exit from a US private equity backed Google app business;
- a number of corporate clients based in Italy and America on a wide range of employment matters.
Conferences and Events
In October 2014, Duncan Innes attended the IBA conference in Tokyo, the world’s largest meeting of lawyers.
Thank you for taking a few minutes to look at this edition of the MH Update.
It has been interesting raking over the embers of the general election and some of its statistics. The Conservatives had 36.9% of the vote so on a 66% turnout their majority was secured with about 24% of the available votes. This is more or less the normal situation under our system. The real shock of course was the imbalance when the number of votes against the number of seats is calculated. It took an average of 40,000 votes for each Labour MP, 34,000 votes for each Conservative MP, 25,000 for each SNP MP, 300,000 for each Liberal Democrat MP, 1,150,000 for the one Green MP and what must surely be an unprecedented 3,800,000 for the one UKIP MP.
Taken together, the Lib Dems, Greens and UKIP won 24% of the votes and between them they have just 10 MPs out of a total of 650 which is about 1.5%. The SNP had 4.7% of the votes which won them 56 MPs which is about 8%: so five times more MPs for about a fifth of the number of votes. Traditionally of course the government of the day is not much inclined to change the system which put it there.
Today the headlines have moved on. “For too long, we have been a passively tolerant society, saying to our citizens ‘as long as you obey the law, we will leave you alone’.” It is a measure of the interest in the political process that the election has generated, that this statement from Mr Cameron has been much bewailed and, in my hearing at least, by two well informed teenage voters.
Their interest is as welcome as it is well directed as this raises an important question of what it is legitimate for the law to encompass. Will the so-called ‘snoopers’ charter’ now be passed, which the Lib Dems vetoed on the grounds of it being a violation of the right to free speech? If the beneficiaries of our excessive tolerance are ‘extremists’ how can such a notion be encapsulated in statutory language without potentially being much too imprecise? No doubt we will find out soon enough.
So some of the most basic elements of our legal system are in the spotlight: our constitution and the right to free speech and all this in the year when we celebrate the 800th anniversary of Magna Carta which set in motion the granting of some of our most fundamental rights. I have not been to the exhibition at the British Library yet but I gather it is fascinating and firmly intend to go. I found it hard to believe but apparently the display, as well as including copies of Magna Carta and the earliest English royal will, give us the opportunity to see two of King John’s very own teeth. No doubt these royal molars were subjected to much grinding and gnashing over the vexed subject of the Charter so are rather appropriate, if improbable, witnesses of the meeting at Runnymede. It’s a chance not to be missed.
Sadly, I cannot close without mentioning that this is the first publication since Duncan Innes died in February. He was a partner in the firm for over 20 years and is much missed. A large contingent from the firm and many of his other friends, which included many whose friendship stems from his work, attended a lovely funeral for him. I understand that Vera intends to have a memorial service for Duncan but that will not be until the autumn. Details will be circulated and included on the firm’s website nearer the time. It is not all sadness, however, and it is all the more of a joy to announce the birth of Guy and Renate Hitchin’s baby Riley, Aideen Burke’s and Brian’s baby Alanna and Ben and Des Devons’ baby Constantino. Their news and the pictures of their beautiful children have been uplifting for us all and help us turn our attention to the future. I am sure you join everyone at Marriott Harrison in congratulating them and sending them our best wishes.
The UK Patent Box enables companies to apply (subject to certain phasing-in rules) an effective 10% corporation tax rate to profits earned from its patented inventions. After initial announcements of a proposed tax break for intellectual property in 2009, the Patent Box finally came into effect on 1 April 2013. However, following a campaign led by Germany arguing that the UK scheme is unfairly competitive, the regime (which is still in its infancy) is already set on course to be transformed.
The Patent Box, in its current form, will be closed to companies that have not elected into it by June 2016, and will be closed altogether by June 2021. Companies could, therefore, still benefit from the tax break under the existing rules for a few more years, but must act swiftly if they have not yet elected into the scheme. Although a replacement scheme will likely be introduced, any new scheme will almost certainly have a narrower application.
About the Patent Box
The introduction of the Patent Box in the UK, which was designed both to boost R&D investment in the UK and to encourage UK companies to commercialise their R&D and resulting innovation, has been welcomed by many high-tech companies with a tax domicile in this country.
Although the UK is not alone in Europe in offering such a scheme, the UK scheme is in some respects more attractive. It applies to profits derived from the worldwide income arising from the exploitation of qualifying patents. To qualify, a patent must have been granted by an approved patent-granting body, including the UK Intellectual Property Office, the European Patent Office and the national patent office of certain designated European territories. However, income arising from the exploitation of a qualifying patent can take one of many forms: it includes income from the sale of the patent or an item incorporating it, worldwide licence fees and royalties from rights in relation to the patent that the company grants to others, income or gains from the sale or disposal of the patent, as well as amounts received from others accused of infringing the patent.
Importantly, companies are able to reap the benefits of the scheme whether the R&D underpinning the qualifying patent occurred in the UK or elsewhere. It is this aspect of the scheme that has generated the most controversy, and that has recently forced the UK government to agree to make changes to it.
Foreign opponents of the UK Patent Box (and other similar schemes operated elsewhere) have been arguing that it encourages the artificial shifting by companies of profits away from where the real economic activity takes place (i.e. where the R&D takes places) to the UK.
The UK government, which has been at the forefront of international attempts, through the Organisation for Economic Cooperation and Development (OECD), to stop harmful tax practices, ultimately struggled to defend the Patent Box against these allegations. It has, therefore, agreed with Germany to adopt a new tax break regime based on the location of the R&D expenditure incurred in developing the patent or any product incorporating the patented invention. Whilst the aim of this is to deter multinationals (whose R&D expenditure or part of it is located outside the UK) from moving their tax domicile to the UK, the details of how this will be applied in practice are yet to be agreed. In particular, concerns have been expressed about how to identify and calculate qualifying R&D expenditure where this expenditure is spread across multiple territories.
What is clear is that the existing regime will be closed to new entrants by June 2016, and will be abolished altogether by June 2021.