Thought Leadership

U.K. Quarterly Corporate Update, April 2022

April 11, 2022 Reports and White Papers

Interim Report on Electronic Signing Published by the Industry Working Group

The Industry Working Group has published an interim report outlining best practice guidelines on executing a document electronically in England and Wales and proposals for future reform in this area. The best practice guidelines are aimed not only at private practice and in-house legal professionals, but all businesspeople. The Industry Working Group plans to publish its full report later in 2022 which we understand will also address cross-border issues arising from the use of electronic signatures.

We have summarised the Industry Working Group’s best practice guidelines and proposals for future reform in the table below.

Best Practice Guidelines Future recommendations to help make electronic signing more mainstream in business/legal transactions
Agree on the process for executing documents at the outset of a transaction. Make digital identities available to all physical persons who wish to have one.
Decide on the type of electronic signature from a choice of three categories: “qualified electronic signature”, “advanced electronic signature” and “simple signature” taken from the EU Electronic Identification, Authentication and Trust Services Regulation. Fulfill the function of physically witnessing a signature and signing an attestation by combining qualified electronic signatures and digital identities, and introducing legislation to permit remote witnessing (e.g., via videoconference) together with permanently extending temporary provisions which allow individuals to witness the execution of a will remotely (e.g., via videoconference).
Utilise a signing platform with security and functionality specifications and a strong audit trail to show signatories’ intention to sign. More accessible guidance on qualified electronic signatures to encourage their use, especially with the rise of smart contracts.
Consider if any additional evidence is needed to record the fact that a signatory approves the document. Create a cross-border database of permissible regulatory and execution modes.
Provide different options to vulnerable signatories (if possible) so that they can use a signing method suitable to them. The development of a ‘trust framework’ by the Department of Culture, Media and Sport to facilitate the use of electronic signatures.
Where possible offer easier authentication processes for signatories with secure digital identities. Government adoption of electronic signatures in its own transactional dealings with third parties.

Should you wish to discuss or require further information about anything covered in this note, please contact Salma Seoudy.

This note is a general summary and it should not replace legal advice tailored to your specific circumstances.

Corporate Transparency Reforms Set Out by U.K. Government

In a multipronged approach to combatting economic crime through enhanced transparency, the U.K. Government published the Corporate Transparency and Register Reform White Paper (the White Paper) on 28 February 2022, which pulls together responses to the U.K. Government’s previous consultations in the following three areas:

  1. implementing the forthcoming ban on corporate directors;
  2. reforming the way company information is held in the U.K.; and
  3. improving the quality of company accounts.

The proposals are extensive and do not lend themselves easily to a user-friendly summary. We would be happy to discuss the numerous detailed proposals contained in the White Paper and what these will mean to your business specifically in practical terms. However, we have sought to broadly summarise the most salient points from the White Paper in general terms in the table below.

Proposals
Banning Corporate Directors
  • Corporate entities will no longer be able to serve as directors of a U.K. company, unless the corporate director’s own directors are all natural persons and their identities are verified before the appointment of the corporate director.
  • Overseas entities will not be allowed to serve as corporate directors of U.K. companies; only U.K. entities with legal personality will be allowed.
  • The restriction will not apply to corporate members of LLPs or corporate general partners of limited partnerships. These members will need only to provide details of their directors/managing officer, whose identity must be verified.

Reforming the U.K. Companies House Register

  • Directors to be given personal accounts on Companies House to centrally manage their individual company appointments.
  • Companies House to have powers to question the accuracy of information it receives and remove information affecting the integrity of its public register, e.g., information which is erroneous and/or deliberately falsified.
  • As with reporting PSC discrepancies, regulated professionals must report on discrepancies between information they hold on a company’s directors and registered office and the equivalent information held on file at Companies House.
  • Companies House to have powers to sanction entities which fail to respond sufficiently to its enquiries.
  • Companies House to have powers to reject proposed company names and order change of names in certain situations.

Identity Verification

  • Certain individuals including directors, LLP members, general partners of limited partnerships and PSCs must first verify their identities before making Companies House filings.
  • Directors must set up an account with Companies House and verify their identity before their board appointment can be registered.
  • Verification will take the form of a photo of the person’s face alongside their authorised identity document.
  • Existing directors and PSCs will have a fixed period within which they must verify their identity failing which they will have committed a criminal offence which will be noted on the company’s file. (Note a director’s failure to comply will result in both the director and the company they direct committing a criminal offence.)
  • Formation agents can still verify the relevant identities, provided they register with Companies House and can provide evidence that they are supervised for AML purposes. Formation agents not in the U.K. will need to register in the U.K. or prove they are subject to an equivalent supervisory regime.

Protecting personal information

  • Individuals will be able to protect their safety by making applications to conceal their personal information, including information which is currently public.
  • For individuals at serious risk of harm, their name and all their details may be supressed from public view.
  • Signatures on documents such as copies of resolutions, accounts and solvency statements may also be supressed from public view.
  • There will no longer be a requirement for directors to provide their “business occupation”.

Improving the quality of company accounts

  • Allowing companies to undertake a single filing of accounts in digital format with both Companies House and HMRC. The Government is also looking at ways in which companies can file their accounts just once a year in one place instead of at different times of the year with different governmental departments.
  • Accounts filed to Companies House will have to be tagged using ‘iXBRL’, a type of file format which is currently mandatory for companies admitted to a U.K. regulated market.
  • Small companies will no longer be able to file “filleted” or “abridged accounts”. Instead, they must file a full balance sheet, profit and loss account but can still opt out of filing a director’s report.
  • Companies House will validate accounts and reject any that fall below statutory requirements.

Should you wish to discuss or require further information about anything covered in this note, please contact Salma Seoudy.

This note is a general summary and it should not replace legal advice tailored to your specific circumstances.

European Professional Club Rugby v RDA Television LLP [2002] EWHC 50 (Comm): Force Majeure Clause Interpreted in the Context of COVID-19

Background:

This case concerned a contract given by European Professional Club Rugby (EPCR) to RDA granting media rights relating to two European rugby union football competitions. RDA intended to sublicense these rights for certain fixtures to organisations which would broadcast them in various countries.

The contract contained a usual force majeure clause, stating that none of the parties would be liable for delays in performing, or failing to perform, their obligations due to a force majeure event. The contract also stated that if the force majeure event “prevents, hinders or delays a party’s performance of its obligations for a continuous period of more than 60 days, the party not affected could terminate the contract on 14 days’ written notice”.

Due to the pandemic, EPCR could not schedule certain fixtures for the 2019/2020 season before it ended, which led to RDA sending a notice to terminate the contract.

Issues

EPCR argued that RDA could not terminate the agreement because RDA could only do so if it was “not affected by” the force majeure event, as per the terms of the contract. Since RDA had also been affected by the force majeure event as its sublicensees declined to pay, EPCR argued that there was no right to terminate, and that RDA had served this notice to terminate to force EPCR into pricing negotiations over the contract.

The High Court’s Judgment

The High Court held that the phrase “the party not affected by” was to be interpreted in context to other force majeure clauses in the contract. The clause makes mention of the party who had been owed the delayed/hindered performance (RDA), and it does not stop that party from being able to terminate the contract because it was also affected generally by the same event or else that would be “commercially absurd”.

The High Court also added that even if RDA wished to negotiate pricing on the contract, this did not deprive it of its right to terminate in the case of an unremedied force majeure event.

Conclusion

This decision highlights the court’s commercial and logical approach to force majeure clauses, since a force majeure event by its very nature is very likely to affect more than one party to a contract, particularly if it has extensive effects, such as the COVID-19 pandemic.

The decision to ignore a party’s personal motivations for terminating a contract under a force majeure clause is also significant, since a party’s rights in a contract should not differ over time depending on their speculated motives at a certain point in time.

Although the Braganza duty (an implied duty to act in good faith when exercising the right to terminate a contract) is reluctantly applied by English courts and was not an issue on this case, it is important to note that contracting parties should consider balancing their autonomous right to terminate contracts in a force majeure event with acting reasonably when deciding to terminate.

We advise many clients in the sports sector and would be happy to discuss the importance of this case from a sector-specific perspective.

Should you wish to discuss or require further information about anything covered in this note, please contact Salma Seoudy.

This note is a general summary, and it should not replace legal advice tailored to your specific circumstances.

Private M&A Deals U.K. vs U.S….the long read

Cross-border M&A transactions in the U.K. and U.S. remained prevalent in 2021 and into early 2022 despite the economic uncertainty that exists in today’s markets. Many involved in those transactions were forced to confront a simple but important question: which laws and practices should regulate the transaction? The answer to this question has important implications for those involved in future transactions.

From a seller’s perspective, an English law-styled and governed share purchase agreement is often preferred as it generally results in the sellers facing less potential exposure. By contrast, a U.S.-styled agreement gives buyers stronger recourse should things go wrong. The ultimate choice often depends on the negotiation strength of the parties, the jurisdiction in which the target is located and the method by which the transaction is being conducted.

Click here to read more about the main differences between custom and practice in U.K. and U.S. M&A transactions.

The Commercial Rent (Coronavirus) Act 2022 Receives Royal Assent

The Commercial Rent (Coronavirus) Act 2022 (the Act) received Royal Assent on 24 March 2022 and represents a key legislative development in the context of commercial rent arrears accrued during the COVID-19 pandemic. The Act introduces a binding arbitration process to be used when commercial landlords and tenants are unable to agree how to deal with outstanding rent arrears built up during the pandemic.

The arbitration scheme introduced by the Act is intended to operate as a process of last resort. This means that tenants will, in the first instance, be expected to negotiate with their landlords to agree how to deal with the pandemic-related rent arrears. It is expected landlords will seek to achieve a compromise with tenants where possible.

While survey data from the British Property Federation indicates that agreement on the treatment of pandemic-related rent arrears has been reached in more than 80% of cases, landlords and tenants who have so far failed to reach agreement will need to consider carefully the framework introduced by the Act.

The general moratorium on forfeiture due to nonpayment of rent introduced under section 82 of the Coronavirus Act 2020 (the CVA 2020)ended on 25 March 2022. Other measures restricting landlords’ remedies in respect of rent debts built up during the COVID-19 pandemic have also been phased out as the Government seeks to “draw a line under the uncertainty caused by the pandemic” in respect of commercial rents.

The Act is supplemented by a nonbinding Code of Practice for commercial property relationships during the COVID-19 pandemic (the New Code). The New Code replaces the existing code published on 19 June 2020. The New Code includes guidance and principles on the approach to all negotiations regarding rent arrears accrued during the pandemic and the operation of the statutory arbitration process.

Landlords and tenants should note the Act provides that any unresolved disputes relating to rent debts caught by the new legislation must be referred to arbitration within the period of six months beginning with the day on which the Act was passed into law (i.e., 24 September 2022). Notably, the Act includes provisions that restrict landlords’ remedies in relation to qualifying arrears until the six-month moratorium window for making a referral to arbitration has ended. The Act also has retrospective provisions, applying to certain landlord claims started on or after 10 November 2021.

If you or your clients would like any further information on the Act, the operation of the arbitration scheme and its potential implications, please contact Scott Hilton.

This briefing is a general summary of the information contained in the Act, and it should not replace legal advice tailored to your specific circumstances.

The U.K.’s New National Security & Investment (NSI) Act 2021 – What You Need to Know about Its Potential Impact on Mergers and Acquisitions

Introduction

The National Security & Investment (NSI) Act 2021 (the Act) came into force on 4 January 2021. The Act introduces for the first time in the U.K. a comprehensive national security and investment vetting regime. Whilst it is similar to foreign direct investment (FDI) regimes in other countries (e.g., France, Germany and the U.S.), the Act applies to both U.K. and foreign investors transacting in the U.K. As the world becomes a more uncertain place to do business, governments have been increasing their abilities to intervene with regard to matters of national security.

The U.K.’s new national security regime sits alongside the competition and other non-national security public interest scrutiny provisions in the Enterprise Act 2002. From 4 January 2022, national security considerations in transactions in the U.K. are solely governed by the Act.

Key Points

  • The Act increases the types of transactions which may be subject to national security reviews. Previously concerned with acquisition of control or material influence, the Act now covers a much broader range of deals, including the acquisition of minority stakes and assets such as sensitive technology or intellectual property, as well as the purchase of real estate in sensitive locations.
  • The U.K. Government has a general call-in power in respect of any deals where it has a reasonable suspicion that they pose a risk to national security. This power has retrospective effect and catches any deals which it deems relevant which have completed on or after 12 November 2020.
  • There are substantial sanctions for noncompliance which include fines up to 5% of the parties’ worldwide turnover or £10 million, whichever is greater, and jail terms of up to five years. In the case of the mandatory notification regime, deals not pre-notified are void and unenforceable.

Notification Regimes under the Act

The new Act introduces two parallel notification regimes:

  1. Mandatory notification - requires qualifying transactions to be pre-notified for approval by the acquirer before they can complete.
  2. Voluntary notification - allows any party to a relevant transaction to submit transactions for approval.

1. Mandatory Notification

An acquirer must pre-notify a deal to the Secretary of State if there is a Qualifying Transaction in a Specified Qualifying Entity.

There are no minimum turnover or share of supply thresholds for notification and no exemptions for small transactions. The notification requirement applies to both U.K. and foreign investors.

What is a Qualifying Transaction?

Trigger Events

The trigger events for mandatory notification are:

  • The acquisition causes a change in share ownership or voting rights from:
    • 25% or less to more than 25%;
    • 50% or less to more than 50%; or
    • less than 75% to 75% or more.
  • The acquisition enables the person to secure or prevent the passage of any class of resolution governing the affairs of the entity.

A shareholding or voting rights increase within the current band will not be caught. The definition of Qualifying Transaction can also extend to corporate restructuring or reorganisations.

Specified Qualifying Entity

If a Qualifying Transaction is present, you need to ascertain whether the Qualifying Transaction is in a “Specified Qualifying Entity”. A Specified Qualifying Entity is an entity wheresoever formed or recognised carries on activities in, or supplies good or services to, the U.K., and which falls within the definition of 17 key sectors of the economy set out in the Schedules contained in the Annex to the National Security & Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (the Regulations).

The Regulations set out the following sectors:

  1. Advanced Materials
  2. Advanced Robotics
  3. Artificial Intelligence
  4. Civil Nuclear
  5. Communications
  6. Computing Hardware
  7. Critical Suppliers to Government
  8. Cryptographic Authentication
  9. Data Infrastructure
  10. Defence
  11. Energy
  12. Military and Dual-Use
  13. Quantum Technologies
  14. Satellite and Space Technology
  15. Suppliers to the Emergency Services
  16. Synthetic Biology
  17. Transport

As can be seen, this extensive list includes not only areas of military and defence but also suppliers to Government, as well as research and development in many areas of technology and advanced science fields.

2. Voluntary Notification

If a party feels that a transaction which falls outside the mandatory notification regime may have national security implications, such party can voluntarily notify the Secretary of State of the transaction. Transactions which parties may consider voluntarily notifying include:

  • Qualifying Transactions in Qualifying Entities but which are specifically not covered in the Schedules in the annex to the Regulations.
  • An acquisition which enables the person materially to influence the policy of a Qualifying Entity but falls below 25% of shareholding or voting rights;
  • A person acquires a right or interest in, or in relation to, an asset and as a result the person is able to:
    • use the asset, or use it to a greater extent than prior to the acquisition, or
    • direct or control how the asset is used, or direct or control how it is used to a greater extent than prior to the acquisition.

General Call-In Powers

The Act also provides the Secretary of State a general “call-in” power to review any transaction which they reasonably suspect gives rise to or potentially gives rise to a risk to national security which has not been notified under a mandatory or voluntary notification.

This call-in power is retrospective for any transaction which took place from 12 November 2020, and the Secretary of State has six months from being made aware of the transaction to provide a call-in notice, with a long stop of five years from the date the transaction completed.

As required under Section 3 of the Act, the Department for Business, Energy and Industrial Strategy published the “National Security and Investment Act 2021: Statement for the purposes of section 3” on 2 November 2021. This statement sets out how the Secretary of State shall use the call-in powers and (as set out in further detail below) the factors which shall be taken into account when determining when to use the call-in powers. It is also a useful guide to parties when deciding whether to voluntarily give notice of a transaction under the Act.

Assessing National Security Risk

The Government has issued guidance on the type of transactions where it is likely to use its powers to call in transactions for review under the Act. It provides guidance as to how the Government is likely to assess whether there could be a potential threat to national security in any given transaction. Areas of higher risk are those closely allied but not caught by the definition of the 17 key sectors of the economy highlighted in the Regulations.

This guidance is set out in the “National Security and Investment Act 2021: Statement for the purposes of section 3”.

The Secretary of State will consider the following three risk factors when deciding whether to call in a transaction for review:

  • Target risk – whether the target entity or asset is being used, or could be used, in a way that poses a risk to national security;
  • Acquirer risk – whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from the acquirer having control of the target; and
  • Control risk – whether the amount of control that has been, or will be, acquired poses a risk to national security (a higher level of control may increase the level of national security risk).

Process

Mandatory Notification

If a transaction requires a mandatory notification, then (unless a call-in notice has been previously issued and outstanding) the acquirer must give notice to the Secretary of State prior to gaining control of the entity.

As soon as reasonably practicable, the Secretary of State must then decide whether to reject or accept the notice. If the notice is rejected, the Secretary of State must provide the reasons why it has been rejected. If, however, the notice has been accepted, the Secretary of State must (within a 30-working day review period) confirm whether it has been accepted and whether it wishes to take either no further action or to call in the transaction for a more detailed review under the Act. The Secretary of State has a further 30-working day review period, extendable by an additional 45 working days, to review the transaction in detail.

Voluntary Notification

With regard to a voluntary notification, any party to a relevant transaction can give notice to the Secretary of State that they believe there could be a national security element to the transaction and ask the Secretary of State to review it. It is also possible, prior to making a voluntary notification, to seek informal guidance as to the level of Government interest by contacting the Security Investment Unit. Early favourable guidance can save the parties the expense of making a voluntary notification.

Notification

Once the notice has been given, the Secretary of State must decide whether to reject or accept the notice in the same way as with a mandatory notice.

Consequences

Where a transaction which requires mandatory notification is not approved prior to completion, this will render the transaction null and void.

There are also further civil and criminal penalties, including potential daily penalties for ongoing breaches. Completing a transaction that is subject to mandatory notification without prior approval will also risk a penalty of up to 5% of group worldwide turnover or £10 million (whichever is higher), and imprisonment for individuals for up to five years.

Subject to conditions, the Government has the power to prohibit or allow transactions notified to it or which have been called in. It can also impose interim measures in relation to relevant transactions which prohibit the parties taking any steps to put the transaction into effect. In the normal course of events, this will not stop the parties negotiating a share purchase agreement or an asset purchase agreement.

Conclusion

Parties should give early consideration to the Act’s application to their transaction, especially given the severe sanctions for noncompliance.

In an international transaction, they should also identify any other jurisdictions where there may be relevant national security and or FDI regimes.

If there is a filing obligation or a voluntary notification is deemed advisable, this will affect the deal timetable, and the parties will need to consider whether appropriate conditions need to be inserted into their contractual documentation to protect both parties.

The Act is very wide in scope and catches a large number of transactions. Careful consideration is needed of the Schedules in the Annex to the Regulations. Although the majority of cases are unlikely to cause a problem, early experience of the regime suggests that, in addition to obvious cases like defence and critical infrastructure, entities active in specialist or niche areas or with direct contracts with Government could potentially be caught.

It is therefore important, as soon as possible, to assess whether there could be a need for a mandatory notification or whether a voluntary notification is advisable. In borderline cases we would strongly advise approaching the Security Investment Unit for informal guidance.

Should you wish to discuss the impact of the Act on a potential acquisition or require further information about anything covered in this note, please contact Robert Bell.

This briefing is a general summary of the information contained in the Act, and it should not replace legal advice tailored to your specific circumstances.

U.S. Bidders Lead the Way on U.K. Public Takeovers

U.K. public companies have proved to be attractive targets for U.S.-incorporated businesses of late, with such U.S. bidders seeking to take advantage of a favourable stock market, economic conditions and the attractive valuations of a number of U.K. listed companies.

The increase in U.K. public takeover activity has coincided with the combined effects of a faster than expected rebound of the U.K. economy from the coronavirus crisis, and the certainty now provided following the conclusion of Brexit and the U.K.’s departure from the European Union.

Click here to learn more about U.K. M&A activity by U.S. bidders and opportunities for 2022.

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