Deirdre O’Neill, Corporate Associate, discusses new prospects for prospectus regulation.
The PSC Regime
Since the PSC regime was introduced on 6 April 2016, unlisted UK companies and limited liability partnerships (“LLPs”) have been required to identify individuals who have significant control over the company or LLP and to publicly disclose their details in a separate company register (“PSC Register“).
With effect from 26 June 2017, the regime for investigating and recording information about people with significant control (“PSCs”) over companies and other entities was extended and enhanced to comply with the European Fourth Money Laundering Directive ((EU) 2015/849) . These changes have been introduced into UK law by The Information about People with Significant Control (Amendment) Regulations 2017 (“Regulations”).
Who is a PSC?
A PSC of a company is someone who satisfies one or more of the following five criteria in relation to it:
- Holding, directly or indirectly, more than 25% of the shares.
- Holding, directly or indirectly, more than 25% of the voting rights.
- Holding, directly or indirectly, the right to appoint or remove directors.
- Having the right to exercise, or actually exercising, significant influence or control over the company.
- Having the right to exercise, or actually exercising, significant influence or control over the activities of a trust or firm which is not a legal entity and which meets any of the above conditions.
There are equivalent requirements to establish who is a PSC of an LLP.
BIS has published some useful, albeit not comprehensive, guidance on the meaning of “significant influence or control”. The guidance also sets out a non-exhaustive list of examples of a right to exercise significant influence or control. This includes a person having absolute decision rights or veto rights related to the running of the business, for example changing the company’s business plan or the appointment or removal of the CEO.
It should be noted that the PSC register cannot be blank. Even if a company has no PSCs then that fact should be noted. The guidance prescribes official wording that must be included in a company’s register in this respect.
Indirect holdings held through companies are attributed to an individual if the individual has “control” over those companies. Control is determined using the concept of “majority stake”, which relates to having a majority control of voting rights or having the right to appoint or remove directors of, or having dominant influence over, the company.
Interests Held by Companies
While a company cannot be a PSC, it will be entered on a PSC register if it is a “relevant legal entity” (“RLE”). A company is an RLE if it meets one or more of the specified conditions and is itself required to keep a PSC register, or subject to DTR5, listed on a regulated market or on a specified overseas exchange. The RLE will be “registrable” unless its interests in a company are all held indirectly through one or more legal entities, at least one of which is a registrable RLE in relation to that company. The practical result is that, in a group of UK incorporated companies, each wholly owned subsidiary will only need to record its immediate parent in its PSC register.
Extended Scope of the Regime
When the PSC regime originally came into force, companies subject to Rule 5 of the Disclosure Guidance and Transparency Rules did not have to keep a PSC register. The Regulations now remove this exemption and companies whose shares are admitted to a ‘prescribed market’ that is not a regulated market have now become subject to the PSC regime. This principally affects companies whose shares are admitted to AIM or the NEX Exchange Growth Market (formerly ISDX Growth).
AIM companies must therefore start investigating and collecting information in relation to their PSCs. There is a short grace period for new companies subject to the regime – they must have their PSC register in place by Monday 24 July 2017.
All UK registered LLPs (including Scottish LLPs) are already subject to the PSC regime. However, the Scottish Regulations now introduce a parallel PSC regime for (i) all Scottish limited partnerships (“SLPs”) and (ii) Scottish general partnerships for so long as they are ‘Scottish qualifying partnerships’ (“SQPs”).
SLPs and SQPs are not required to keep their own PSC register but must file the information with Companies House from Monday 24 July 2017. SLPs and SQPs should therefore start making enquiries of their PSCs without further delay.
PSC Register Updates – new 14 day deadlines
From 26 June 2017 (or 24 July 2017 for entities newly within scope of the regime), PSC information needs to be updated on an event-driven basis and entities required to keep a PSC register must:
- update their PSC register within 14 days of either a PSC confirming his/her details (for individuals) or the entity obtaining the relevant information (for relevant legal entities); and
- notify Companies House (using forms PSC01 to PSC09) of the changes to its register within 14 days of the change being made to the entity’s own register. This replaces the old system where the information was supplied to Companies House annually on the Confirmation Statement (CS01).
Given that failure to comply with the PSC regime could result in a company’s officers committing a criminal offence – which could lead to fines and/or imprisonment – it is very important that these new deadlines are adhered to.
Actions to take?
Given the short transitional and filing periods provided in the Regulations, relevant companies should act quickly to assess any actions they may need to take. In particular:
- For relevant AIM or NEX companies – identify any PSCs (or RLEs) and prepare a PSC register containing the relevant details and prescribed statements by no later than 24 July 2017. Further information can be found in the guides referenced below.
- Companies and LLPs already subject to the regime – should familiarise themselves with the new updating timeframes and check to see whether any changes in PSC information have occurred prior to 26 June 2017 (that have not been previously notified to Companies House), which need to be notified by 10 July 2017.
- For confirmation statements due shortly, ensure the new form of CS01 is used and any relevant PSC notifications are made on forms PSC01 to PSC09.
BIS has reissued its various guides on the PSC regime. These can be found here.
For assistance on the PSC regime please contact one of the people named below or your usual contact at Marriott Harrison LLP.
Kitcatt v MMS UK Holdings Ltd [2017 EWHC 675]
Think (about warranties) before you buy!
More often than not, warranties given by the sellers in a share purchase agreement attract the most attention. However, the case of Kitcatt v MMS UK Holdings Ltd demonstrates that buyers must also think carefully before giving any warranties to the sellers.
Kitcatt Nohr Alexander Shaw (“Kitcatt”) was an advertising and marketing agency. The Claimants, being the shareholders of Kitcatt, entered into a share purchase agreement (the “SPA”) to sell the entire issued share capital of Kitcatt to the first defendant, MMS UK (Holdings) Limited (“MMS”), which was a subsidiary of the second defendant, Publicis Groupe (“Publicis”). Publicis wanted MMS to acquire Kitcatt so that it could merge Kitcatt with another subsidiary, Digitas, creating KND.
The deal included an earn-out provision, meaning part of the total consideration the Claimants were to receive was linked to the future performance of KND. As the buyer, MMS warranted that it was not aware of any facts or circumstances that could reasonably be expected to have a material adverse effect on the future operating income and/or revenue of KND. The sole remedy for breach of this warranty was an adjustment to revenue for the purpose of calculating the deferred consideration.
Due to a dramatic loss of work, the revenue of KND dropped to the extent that the deferred consideration for the Claimants was reduced to nil. The Claimants’ case was that the employees of Digitas knew, but failed to disclose, that more than half of Digitas’ UK earnings came from one client, P&G, that access to that work was controlled by other agencies within Publicis, and that Digitas was being cut-off from that work.
The Claimants further alleged that in email correspondence with MMS in December 2012, MMS had already agreed that the earn out consideration payable under the SPA should be adjusted to £2.6 million to take account of the loss of P&G work (the “2012 Agreement”).
MMS subsequently refused to pay any deferred consideration to the Claimants.
The Judge found that there was a breach of warranty. It was not disclosed to the Claimants that the proposed business structure would cut Digitas, and consequently KND, from the P&G work. He also stated that it was obvious that the loss of a major client was capable of having an adverse impact on future performance. The Claimants would therefore be entitled to damages.
Separately, as to the 2012 Agreement, the Judge concluded that there was a binding contract between the Claimants and MMS in the emails on the basis that all elements of a legal contract were present. Consequently, the Claimants were entitled to the agreed adjustment amount for the deferred consideration, being £2.6 million.
The case demonstrates the importance of warranties as a method of protection and that buyers need to be no less careful when giving them. If sellers are giving warranties they should be sure to analyse them carefully, especially in relation to earn-out provisions. It also emphasises the significance of full disclosure, and that it is vital to disclose against warranties to prevent any claim. And of course beware of what is said in emails as they can be contractually binding.
Consequential Loss Re-examined
The traditional meaning of damages for consequential loss was established by Hadley v Baxendale (1854) 9 Exch 341, but has recently been re-examined by the High Court in Star Polaris LLC V HHIC-PHIL Inc  EWHC 2941.
Star Polaris LLC (the Buyer) entered into a contract with HHIC-PHIL Inc (the Seller) to build a ship, the Star Polaris. About eight months after its delivery, the ship suffered serious engine failure and had to be towed to a port for repairs. The Buyer commenced arbitration proceedings against the Seller for breach of contract, seeking compensation for: (i) the cost of repairs to the ship, (ii) various costs arising from the engine failure (namely: towage fees, agency fees, survey fees, off-hire and off-hire bunkers); and (iii) the diminution in value of the ship.
The Seller relied on Article IX of the contract, which set out the Seller’s liability for defects in the ship. It stated that the Seller would provide a 12-month guarantee against any defects or damages caused by “defective materials, design error, construction miscalculation and/or poor workmanship”. Article IX.4 provided that the Seller was to have no other liability in respect of the ship after delivery and the contract expressly excluded “consequential or special losses, damages or expenses unless otherwise stated herein.” The contract also set out that the obligations and liabilities within Article IX were intended to “replace and exclude any other liability” whether under law, custom or otherwise.
The arbitration tribunal found in the Seller’s favour, holding that the Buyer was only entitled to recover its losses for the repair or replacement of defects and any physical damage caused by such defects. In reaching its decision the tribunal noted the clear distinction in the contract between the cost of repair or replacement and the wider costs that can arise as a consequence of the need for a repair or replacement. In this context the word “consequential” had to mean that which follows as a result or consequence of physical damage. The costs arising from the engine failure and the diminution in value of the Star Polaris were a consequence of the breach and therefore specifically excluded under the contract.
The Buyer appealed to the High Court, arguing firstly that the correct interpretation for “consequential loss” should be the meaning as established under the second limb of the Hadley v Baxendale definition. This case identified two types of losses that arise when a contract is breached:
Firstly, direct losses – being those losses arising naturally, or in the usual course of things, or that may reasonably be in the contemplation of the parties when the contract was made.
Secondly indirect and consequential losses – being those losses that result from special circumstances, which will only be recoverable if the defaulting party knew of such special circumstances at the time the contract was made.
Moreover the Buyer sought to argue that the Article IX.4 exclusion’s reference to “special losses” as well as “consequential loss” showed that it was the parties’ intention that the damages sought should fall under the second limb of that test given that the costs arising from the engine failure and the diminution in value of the ship were losses that arose from special circumstances, which the Seller was aware of at the time the contract was made. The Buyer claimed that its Hadley v Baxendale interpretation was supported by numerous Court of Appeal cases and that the tribunal, as a court of first instance, should not have departed from such precedent.
In its judgment, the High Court noted that under Article IX the contract clearly set out the extent of the Seller’s liability and contained “no express provision” that gave the Buyer “a claim for financial loss, lost profit or diminution of value.” The Court determined that the obligation to repair and replace any damage under the guarantee was therefore exhaustive and nothing else was recoverable above and beyond that. The obligation of the Seller was only to replace or repair or bear the cost thereof and any other losses were specifically excluded. The tribunal’s ruling was therefore upheld and the appeal dismissed.
The decision is an example of the Courts refusing to adhere to rigid precedent where it considers that the strict rules run counter to the terms objectively agreed by the parties and laid out in the contract. Careful consideration should therefore be given when drafting provisions that exclude liability on the part of either party. Parties should ensure that their specific intentions are clearly set out in the agreement without ambiguity or reliance on the assumed effect of standardised wording.
The general principle of contract variation is that parties to a contract may vary its terms by mutual agreement, provided that consideration is given and any necessary formalities are followed.
On this basis, it would not be unreasonable to expect that if a variation clause in an agreement states that the agreement can only be varied by written agreement signed by both parties, any attempted oral variation would fall short of such a test. Such clauses are commonly referred to as “anti-oral variation clauses”, the intention of which is to ensure that verbal communications cannot be treated as variations to the contract…or so the parties may have thought.
Over the past 20 years, the Courts, particularly the Court of Appeal, have considered anti-oral variation clauses on a number of occasions. In United Bank Ltd v Asif (unreported, 11 February 2000) and World Online Telecom Ltd v I-Way Ltd  EWCA Civ 413, the Court of Appeal provided two conflicting decisions. Firstly, it held that a contract containing an anti-oral variation clause could not be varied based on a verbal agreement, only to contradict that decision two years later, deciding that a contract could be varied orally despite such a clause. In World Online Telecom, Schiemann LJ undermined what many believed to be the intention behind anti-oral variation clauses, stating that the purpose “is not to prevent the recognition of oral variations, but rather, casual and unfounded allegations of such variations being made”. Whilst the obiter comments of the Court of Appeal in Globe Motors Inc, and others v TRW Lucas Varity Electric Steering Ltd and another  EWCA Civ 396 showed preference for the decision in World Online Telecomm, the law in this area was not clarified until the Court of Appeal’s decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd  EWCA Civ 553.
In MWB, the Court of Appeal held that a contract could indeed be varied by oral agreement, regardless of whether or not an anti-oral variation clause was included. It held that the freedom of contract principle enables parties to agree, vary or discharge a contract as they see fit. In his judgment, Kitchin LJ cited the words of Cordozo J, who stated back in 1919 that “those who make a contract, may unmake it [and] the clause which forbids a change, may be changed like any others”. Whilst parties have the autonomy to agree to include an anti-oral variation provision in their contract, such agreement does not preclude them from subsequently agreeing a variation to that provision, whether orally or by conduct.
In light of the MWB case, it is clear that no clause restricting variations will prevent the parties’ ability to re-negotiate their contractual arrangements. The clause, like any other clause in a contract, may be varied by the will of the parties (whether in writing, orally or through conduct) and parties should be careful about post contract oral discussions, as a variation to the terms of the contract could arise. However, this is not to say that anti-oral variation clauses are now wholly irrelevant. In fact, the Court was keen to point out the importance of the clause. Firstly, by encouraging parties to record variations in writing as a matter of best practice and second, to help to avoid casual and unfounded allegations of oral variations being made by ensuring that a suitable evidentiary bar exists for such a claim to succeed.