Ashurst and Practical Law Corporate Update Q4 2024
16 January 2025
1. Acquisitions: interpretation of material adverse effect condition
28 November 2024
The High Court found that a buyer was not discharged from its obligation to complete an acquisition of a company by the terms of a no material adverse effects (MAE) condition in the share purchase agreements governing the transaction.
Background. The purpose of an MAE clause in an acquisition agreement is to permit the buyer of a target business or company (the target) to terminate the relevant agreement and withdraw from the transaction if certain events occur that have a significantly detrimental effect on the target’s business, assets or profits.
An MAE clause often takes the form of a condition to completion that entitles the buyer to withdraw and terminate the agreement if the target suffers an MAE between the signing of the agreement and the scheduled completion date for the transaction.
Facts. S agreed to purchase the mining assets of two target companies, one of which was A, from F for over $1.2 billion, under two share purchase agreements (the SPAs). A's key asset was a Brazilian nickel mine.
A geotechnical event (GE) occurred at the nickel mine shortly after the signing of the relevant SPA, but before the completion date. The GE caused cracks to the main ramp of the mine but was viewed as a relatively routine event by the mine owners. However, S claimed that the GE event constituted an MAE which permitted it to terminate the SPAs.
When S failed to complete the SPAs on the completion date, F brought an action in the High Court, arguing that the GE was not an MAE and that S's purported termination was wrongful and repudiatory and entitled them to terminate the SPAs and claim damages in accordance with the contractual terms of the SPAs and at common law.
Subject to some common carve-outs, the MAE was defined in the SPA as any "change, event or effect that… is or would reasonably be expected to be material and adverse to the business, financial condition, results of operations, the properties, assets, liabilities or operations of the [target companies] …".
The key question for the court was whether the GE was an MAE that S could rely on in purportedly terminating the SPAs.
Decision. The court held in favour of F, ruling that the GE was not an MAE and that S was not entitled to terminate the SPAs as it was under an obligation to complete the transaction.
In finding that the GE was not a MAE, the court focused on three significant issues of construction.
The court first considered whether the MAE clause could apply to a revelatory event; that is, an event revealed on the occurrence of the MAE. S argued that the GE revealed problems with the nickel mine that would require significant expense to rectify. F denied that the GE revealed wider problems with the mine but argued that even if it did, that did not mean that the GE was an MAE.
The court agreed with F, noting that the problems with the mine had existed when the SPA was signed and that it would be inappropriate to infer that a change, event or effect occurring between signing and completion was material and adverse because it revealed some other problem or issue that already existed and that could have been identified irrespective of the relevant change, event or effect. In reaching this conclusion, the court noted that it was important for the MAE provisions to be read in the context of the SPA as whole, including the other risk allocation provisions in the SPA.
The MAE definition and its deployment in the MAE condition demonstrated that it was concerned with matters occurring after signing. The language of the MAE definition also dictated that a matter was only an MAE if the change, event or effect was itself material and adverse. What might have been revealed as a consequence of the GE and the investigations it triggered regarding the alleged problems with the nickel mine was irrelevant to the materiality of the GE.
The second significant construction issue in determining whether the GE was an MAE involved assessing what would reasonably be expected to be material and adverse. F argued that the test required an objective assessment of whether it would reasonably be expected that the matter was material and adverse. This assessment would give a single answer: yes or no. S argued that there might be a range of views held by reasonable people in the position of the parties, and that if any of those was that the matter was expected to be material, then it was reasonably expected to be material. The court agreed with F. Further, when assessing what would reasonably be expected to be material and adverse, the test was whether a reasonable person would have considered it more likely than not that the matter would turn out to be material. A mere risk that a matter could turn out to be material was not enough.
The third significant construction issue in determining whether the GE was an MAE concerned the meaning of materiality. In considering the effect on the equity value of the target, the court noted that a material change, event or effect required something significant or substantial. Here, the cost of repairing the damage caused by the GE was extremely modest compared with the value of the transaction.
The court confirmed that there is no universally applicable materiality test for MAE clauses, and that several considerations can be relevant when assessing a particular case. Here, relevant factors included the transaction size, the nature of the assets concerned, the length of the sale process and the complexity of the SPAs, all of which militated against setting a low bar. On the facts, the court considered that a reduction in equity value of at least 20% would be material, with 15% potentially sufficient, but 10% likely too low in the circumstances. However, whichever threshold applied, the court considered the GE was not material on the facts.
The remaining quantum issues in the case are to be determined at a subsequent hearing.
Comment. The decision is important as it provides new guidance confirming that an MAE clause will not generally apply to a revelatory event. Instead of applying to an issue that might be revealed by a material change, event or effect, the decision demonstrates that an MAE clause applies to the change, event or effect itself.
The decision also provides a useful indicator on the issue of materiality where, on the facts before it, the court considered that a reduction in the value of the target of at least 20% would be considered as material, although the judgment did not give a detailed explanation for this figure.
More broadly, the decision reiterates that the court's construction of an MAE clause can be highly fact and language-specific, which underscores the importance of parties negotiating the exact wording of these clauses to ensure that they are suitable. The judgment is helpful for anyone involved in negotiating MAE clauses as it provides a comprehensive review on the approach adopted to construing them in both England and Wales and the USA, where they tend to be deployed and litigated over more frequently.
2. Directors: IoD code of conduct for directors
28 November 2024
Background. Company directors must comply with specific legal and regulatory responsibilities, including the general legal duties set out in the Companies Act 2006. The role of company director is increasingly challenging and often involves more than complying with the law or applying specialist knowledge and expertise. Directors are expected to define and embed the values of their organisation and apply high ethical standards.
Facts. The code is a voluntary source of guidance for directors and has no formal enforcement mechanism. It is intended to be a practical tool to help directors make better decisions and to help them to build and maintain the trust of the public in their business activities.
The code is directed at individual directors, as well as anyone fulfilling a director or director-equivalent role in the private, public and not-for-profit sectors and in organisations of all sizes, including listed companies and publicly owned entities.
Boards are encouraged to commit to the code publicly, with suggested mechanisms of doing so including disclosure in annual reports and on websites, communication to employees and other stakeholders, and through social media. A kitemark to signify commitment has been developed.
The code is structured around six principles of director conduct, with each principle being underpinned by a number of undertakings and outcomes. The IoD's intention is that, by applying the principles and fulfilling the undertakings, directors will be well placed to achieve the relevant outcomes. There are no changes to the principles set out in the consultation, which are:
- Leading by example; that is, demonstrating exemplary standards of behaviour in personal conduct and decision-making.
- Integrity; that is, acting with honesty, adhering to strong ethical values, and doing the right thing.
- Transparency; that is, communicating, acting and making decisions openly, honestly and clearly.
- Accountability; that is, taking personal responsibility for actions and their consequences.
- Fairness; that is, treating people equitably, without discrimination or bias.
- Responsible business; that is, integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts.
The IoD states that it plans to review and update the code on a periodic basis. It will develop guidance on the code which describes how it can be applied in a variety of real-life scenarios.
Source: Institute of Directors: the code, 23 October 2024
3. ECCTA: reformed role of Companies House
28 November 2024
Companies House has published a policy paper (the policy paper) on the outline transition plan for reforming its role in connection with the Economic Crime and Corporate Transparency Act 2023 (ECCTA).
Background. In March 2024, ECCTA provisions came into force giving Companies House new powers to improve the accuracy and integrity of the information on the register.
Facts. The policy paper highlights the ECCTA-related reforms made since March 2024.
It also includes a timetable for the remainder of reforms to be introduced, subject to Parliamentary time, indicating that Companies House should be able to:
- Issue financial penalties for any relevant offences under ECCTA and the Companies Act 2006, by autumn 2024.
- Expedite the striking off of companies where the company has been formed for a false basis and annotate the register in a wider range of circumstances, including where a director is disqualified but the relevant company fails to notify the registrar of their termination, by winter 2024 into 2025.
- Carry out checks on authorised corporate service providers (ACSPs) to authorise them to carry out identity verification (IDV) services, allow individuals to complete IDV voluntarily, and receive and assess applications from individuals seeking to have residential addresses suppressed from public disclosure in certain circumstances, by spring 2025.
- Allow access on request to certain trust information on the Register of Overseas Entities, by summer 2025.
- Make IDV compulsory on incorporation for new directors and new persons with significant control (PSC), and begin a 12-month transition period to require IDV for existing directors and PSC, by autumn 2025.
- Require IDV for presenters filing any document, require a third-party agent filing on behalf of a company to be registered as an ACSP, and reject documents that are filed by a disqualified director on their own behalf, by spring 2026.
- Introduce additional filing requirements for limited partnerships, complete the transition period for requiring IDV, and start enforcement activity against those who have failed to complete IDV where required to do so, by the end of 2026.
The policy paper also sets out the intended powers that Companies House will have following the implementation of restrictions on corporate directors and of accounts reform, including the ability to mandate software-only filing for all accounts.
Source: Companies House: the policy paper, 16 October 2024
4. ECCTA: Companies House guidance on financial penalties
31 October 2024
Companies House published guidance on its approach to financial penalties under the Economic Crime and Corporate Transparency Act 2023 (Financial Penalty) Regulations 2024 (SI 2024/445) (2024 Regulations) (the guidance).
Background. The Economic Crime and Corporate Transparency Act 2023 (ECCTA) aims to prevent the abuse of UK corporate structures and tackle economic crime.
The 2024 Regulations, which were brought into force in May 2024 as part of early ECCTA reforms, allow the Registrar of Companies (the Registrar) to impose a financial penalty on a person if it is satisfied beyond reasonable doubt that the person has committed misconduct amounting to a relevant offence under section 1132A of the Companies Act 2006 (2006 Act) (section 1132A).
The offences under section 1132A include most offences under the 2006 Act other than those concerning audit, company secretaries and resolutions and meetings.
The 2024 Regulations require the Registrar to issue a warning notice before imposing a financial penalty, giving the recipient 28 days to make representations (paragraph 4, 2024 Regulations).
Facts. The guidance includes further detail about the content of a warning notice and the actions that a recipient should take. If the recipient complies with the requirement explained in the warning notice and corrects the relevant defect, the Registrar will not issue a penalty notice. For example, the recipient of a warning notice that is issued for a failure to file a confirmation statement will not receive a penalty if the confirmation statement is filed within 28 days of the warning notice date.
A warning notice recipient can make representations to the Registrar within 28 days of receipt, using the process outlined in the guidance. If the Registrar remains satisfied beyond reasonable doubt that the recipient has engaged in conduct amounting to a relevant offence, it may issue a penalty notice after 28 days of the warning notice date.
The guidance outlines the required contents of the penalty notice.
If a recipient persists in not complying with the requirement explained in the warning notice, the guidance explains that the Registrar may issue further penalties in addition to the original penalty.
The guidance also explains how Companies House calculates penalties, how to pay a penalty, how to appeal a penalty, what happens if a penalty is not paid within 28 days of the penalty notice date and sets out the amounts of the financial penalties that may be imposed.
Source: Companies House approach to financial penalties, 27 September 2024
5. ECCTA: further regulations issued
28 November 2024
Regulations and draft regulations have been issued to progress the implementation of key parts of the Economic Crime and Corporate Transparency Act 2023 (ECCTA).
Background. ECCTA has introduced a wide range of measures to improve corporate transparency and prevent economic crime, which are being implemented in stages.
Companies House has issued an outline transition plan for reforming its role, which involves the initiation of many regulations over the next 18 months.
Facts. Regulations and draft regulations have been issued to progress the implementation of key parts of ECCTA, including by extending their scope to limited liability partnerships (LLPs).
The Limited Liability Partnerships (Application of Company Law) (No 2) Regulations 2024 (SI 2024/1078) (2024 Regulations)
The 2024 Regulations provide for further amendments made to company law by ECCTA to apply, with modifications, to LLPs. These include empowering Companies House to impose financial penalties on LLPs and their members directly for relevant LLP-related offences, as well as being able to remove an LLP from the register and consequently bring about its dissolution if there are reasonable grounds to believe that false or misleading information was provided when the LLP was formed. The 2024 Regulations come into force at the same time as other ECCTA provisions, giving Companies House the power to strike off companies registered on a false basis, come fully into force.
The draft Unique Identifiers (Application of Company Law) Regulations 2024 (draft UID Regulations 2024)
The draft UID Regulations 2024 empower Companies House to allocate unique identifiers (UIDs) to individuals associated with LLPs and limited partnerships, to ensure that identity verification operates effectively for such entities, as well as for companies. The draft Registrar (Identity Verification and Authorised Corporate Service Providers) Regulations 2024, which were issued in May 2024, enable Companies House to allocate UIDs to individuals associated with companies. These regulations will come into force at the same time as the identity verification provisions in ECCTA come fully into force.
The revised draft Companies and Limited Liability Partnerships (Protection and Disclosure of Information and Consequential Amendments) Regulations 2024 (draft URA Regulations 2024)
The draft URA Regulations 2024 extend the circumstances in which individuals, such as directors or persons with significant control, may apply to protect their usual residential address (URA) where it appears on the register, by requiring Companies House not to display the address publicly. In particular, the draft URA Regulations 2024 enable an individual to apply to protect their URA if it is derived from the filing of an annual return at Companies House. They also apply modified provisions to LLPs, ensuring that the framework for addresses and disclosure of information held at Companies House remains in line with that for companies. If approved by Parliament, they will come into force on 27 January 2025.
6. Corporate reporting: FRC annual review 2023/24
31 October 2024
The Financial Reporting Council (FRC) published its annual review of corporate reporting for 2023/24 (the review).
Background. High-quality financial reporting facilitates companies’ access to capital and supports UK economic growth and competitiveness. The FRC’s corporate reporting review team is responsible for reviewing the annual reports of quoted and large private companies and limited liability partnerships.
Facts. The review sets out the findings from the FRC’s review work in the 2023/24 monitoring cycle and its expectations for the 2024/25 reporting season.
The review confirms that the quality of corporate reporting across the FTSE 350 companies reviewed in 2023/24 was maintained. However, there was evidence of a widening gap in reporting quality between companies within the FTSE 350 and other companies. For companies predominantly outside the FTSE 350, improvements to reporting on the impairment of assets and cash flow statements remain the FRC’s two areas of most concern.
The review reiterates that the FRC will continue to take a proportionate and targeted approach to its monitoring to ensure that companies comply with the relevant reporting requirements, noting that it does not expect companies to provide information in their annual reports and accounts that is not material or relevant to users.
In relation to sustainability reporting, the review notes that, despite the complexities of the requirements, there were comparatively few compliance issues in premium-listed companies’ reporting against the Taskforce for Climate-related Financial Disclosures framework.
The review highlights that in 2024/25 the FRC expects companies to, among other things:
- Ensure that they have a sufficiently robust review process in place to identify common technical compliance issues. Companies should consider the top ten reporting issues that are highlighted in the review, including ensuring that clear, company-specific accounting policies are included for key matters, such as revenue recognition.
- Give clear and consistent disclosures about uncertainty and risk that are sufficient for users to understand the positions taken in the financial statements.
- Ensure that the strategic report includes a fair, balanced and comprehensive review of the company’s development, position, performance and prospects. Companies should take care to comply with applicable climate-related reporting requirements, ensuring that disclosures are concise and that material information is not obscured.
- Consider whether the report and accounts tell a consistent and coherent story throughout the narrative reporting and financial statements. Although material and relevant information should be included, good quality reporting does not necessarily require a greater volume of disclosure.
Source: FRC: Annual Review of Corporate Reporting 2023/2024, 24 September 2024
7. Investment Association: revised principles of remuneration
31 October 2024
The Investment Association (IA) issued a revised version of its principles of remuneration (the principles).
Background. Institutional investors own a substantial proportion of the shares in listed companies and their representative bodies publish guidelines in relation to appropriate executive remuneration. The IA's principles are the most widely known set of guidelines. The most recent version was published in November 2022.
In February 2024 the IA circulated a letter to remuneration committee chairs confirming its intention to update the principles to reflect evolving views and market practice, and to simplify the guidance.
Facts. The principles set out three overarching objectives of remuneration policies:
- Promoting long-term value creation through the delivery of the company’s strategy.
- Supporting individual and company performance within the context of the sustainable long-term financial health of the business and sound risk management.
- Seeking to deliver remuneration levels that are clearly linked to company performance.
The IA emphasises that:
- The principles are not rules but guidelines seeking to foster good practice and alignment with investor expectations and to support a competitive market environment.
- Rather than prescribing any particular remuneration structure or quantum, the principles aim to provide a framework within which companies can design remuneration policies and practices that are appropriate to their specific needs and circumstances, while also being responsive to shareholder expectations.
- While the principles and supporting guidance set out an approach that is commonly accepted as appropriate for most companies, investors will take a case-by-case approach to analysing the suitability of remuneration arrangements. Companies are encouraged to adopt the right remuneration structure for their business, corporate strategy and performance, and to engage with investors to understand their views and clearly explain why the adopted policy and approach is appropriate.
- The principles build on, and should be read in conjunction with, the remuneration expectations set out in the UK Corporate Governance Code.
Source: IA: Principles of Remuneration, 8 October 2024
