U.K. Quarterly Corporate Update, September 2022

October 3, 2022 Reports and White Papers

First Prohibition Orders under U.K. NSI Act 2021 Target Acquisition of Technology

In July 2022, the U.K. Government used its powers under the National Security and Investment Act 2021 (NSI Act) – which is, in broad terms, the U.K. version of the Committee on Foreign Investment in the United States – to block a transaction for the first time. What is surprising is that it would choose the grant of know-how licence rather than the acquisition of a company for its first prohibition decision (referred to as a “Final Order”).

On 17 August 2022, the U.K. Government proved its more interventionist credentials by passing another Final Order prohibiting the acquisition of an English company by a Hong Kong-based acquirer on the basis that the target company held intellectual property (IP) and know-how in certain dual-use technology.

In the current uncertain geopolitical and economic climate, these decisions signal the importance the U.K. Government attaches to the transfer of sensitive IP and technology, and why it is important to carefully review technology licences and asset acquisitions under the NSI Act.

University Vision-Sensing Technology Licence

This case involved the grant of a proposed licence of IP rights from the University of Manchester (University) to Beijing Infinite Vision Technology Company Ltd. (Beijing Infinite) in respect of the University’s SCAMP-5 and SCAMP-7 vision-sensing technology. The NSI Act does not require the mandatory notification of the acquisition of assets or technology licences. Mandatory notification is only required for the acquisition of certain trigger thresholds of equity investment in qualifying entities. However, the parties can decide to voluntarily send notification of the transaction. It is believed that the University decided to notify voluntarily, and the Government called in the transaction for a full national security review. On 20 July 2022, following its review of the transaction, the Secretary of State for the Department for Business, Energy, and Industrial Strategy (BEIS) published a Final Order blocking the proposed licensing arrangement.

Public details about the case are few, but according to public reports, the University and Beijing Infinite entered into the licence agreement under which Beijing Infinite would use certain IP related to vision-sensing technology to develop, test and verify, manufacture, use and sell the relevant technology in connection with children’s toys. However, BEIS took the view that the SCAMP-5 and SCAMP-7 vision-sensing technology was not only capable of being used for commercial applications, but could potentially also be used for military purposes. Therefore, they concluded that the technology could be used to build defence or technological capabilities which could pose a national security risk to the U.K. The licence agreement was therefore prohibited.

So, what lessons can be drawn from this case for future transactions?

IP Rights Subject to Review: Although IP licences are not subject to mandatory notification under the NSI Act, this case emphasises that their acquisition can hold similar national security risks as those attached to equity investments in qualifying entities. Therefore, parties should, in the case of all IP licences or assignments, review whether there are underlying national security risks which would make it prudent to notify. The Government has the power under the NSI Act to call in an IP licence or acquisition of an asset for up to five years from its grant or acquisition. So, this Final Order suggests that acquiring companies with U.K. assets or licensing U.K. technology can present significant risk with respect to legal/deal certainty.

Chinese Involvement in U.K. Higher Education Sector: There has been a large increase in the acquisition of U.K. technology by Chinese companies in recent years. This has been seen primarily through the acquisition of companies. However, there has been a growth in Chinese involvement and investment in academia. There have been concerns about technology transfer through this source, and this is what may have spurred on the University to make a voluntary notification. The NSI Act notification obligations apply equally to U.K. and foreign investors, but where the nationality of the investor or the licensee is from a country which could be interpreted as a potential hostile foreign actor, the acquisition risk is substantially enhanced, as in this case.

Was the Final Order A Surprise?The fact an IP licence was the subject of the first prohibition decision under the NSI Act caught most people by surprise. Mature consideration of the facts behind the case demonstrates that the issue of a Final Order in this case was likely to be expected. The Secretary of State’s Final Order is consistent with BEIS’s Guidance for the Higher Education and Research Intensive Sectors published in January 2022 (Guidance).

This also reflects the trends seen in foreign direct investment regimes in other European countries. It is also significant that the recipient of the technology was a Chinese party. The licence agreement in this case involved technology linked to several of the 17 high-risk sectors set out under the Annex to The National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 including advanced robotics and dual-use items. Under the Guidance, the Government has indicated that transactions involving these high-risk sectors are most likely to present significant national security risk.

Acquisition of Pulsic Limited Prohibited

On 17 August, the U.K. Government passed another Final Order blocking Super Orange HK Holding Limited (Super Orange), a Hong Kong firm, from acquiring the entire share capital of a U.K. electronic design company Pulsic Limited (Pulsic) because of concerns over risks to national security. This move is the latest attempt to limit Chinese involvement in British businesses and technology.

Pulsic, which has offices in Bristol, Newcastle, Tokyo and San Jose, owns IP and know-how relating to the development of software used in the production of electronic design automation (EDA) products. This technology could be used to facilitate the building of cutting-edge integrated circuits which could be used in civilian or military applications.

It was the dual-use application of these tools which gave the Government concern. It feared that the EDA technology could be exploited to introduce features into the design, including automatically and/or without the knowledge of the user, that could be used to build defence or technological capabilities. The Secretary of State therefore considered that the acquisition of Pulsic by Super Orange could pose a risk to national security. The transaction was therefore prohibited.

How does the Pulsic order differ from the Beijing Infinite order, and what lessons can we draw from the Government’s latest blocking decision? There are many similarities between the Pulsic and Beijing Infinite cases. Both involve China/Hong Kong-based companies. They both relate to the acquisition of advanced technology which can be used potentially for defence or military applications

The difference in the Pulsic case was that it related to an equity investment rather than an IP licence. However, in both cases, the importance lay in the underlying capability of the technology owned or licensed and the potential defence or military applications.

The above cases demonstrate that the review of the acquisition of technology under the NSI Act is a priority for the U.K. Government. This scrutiny can take the shape of reviewing standalone IP licences or assignments, or could be in the context of an equity investment in a target company. These decisions heighten deal risk for those investors acquiring U.K. companies having technology assets or just licensing the technology itself.

The Beijing Infinite case demonstrates that, although not subject to mandatory notification, the Government will not hesitate to call in and prohibit the licensing or assignment of sensitive technology which poses a threat to national security. 

Both the Pulsic and Beijing Infinite decisions also highlight that it is not only mainstream military/defence-based technology that it is covered by the NSI Act’s scrutiny. It can also extend to technology with commercial applications which may have a dual military use.

Therefore, parties acquiring an equity stake in a target owning IP rights or licensing technology independently are recommended to review these transactions carefully with particular focus on the underlying nature of the technology acquired or licensed and the uses to which it may be put. In the case of a corporate acquisition, the transaction may be subject to mandatory notification. But in cases which relate to the standalone licensing of IP rights (which do not fall within the NSI Act’s mandatory notification provisions), it may be prudent, like the University in this case, to make a precautionary voluntary notification.

Should you wish to discuss or require further information, please contact Robert Bell.

High Court Holds that COVID-19 Restrictions Did Not Amount to Force Majeure

Bart Maritime and NKD Maritime Ltd entered into an agreement, whereby NKD agreed to purchase an old ship from Bart to be delivered to a recycling yard in India.  The contract contained a force majeure clause stating “should the Seller be unable to transfer title of the Vessel, or should the Buyer be unable to accept transfer of the Vessel . . . due to [(among other things)] . . . restraint of governments, . . . then either the Buyer or the Seller may terminate this Agreement . . . without any liability upon either party . ..”

Whilst the ship was on its way to the designated destination, India went into lockdown in response to the COVID-19 pandemic and Bart was unable to deliver the ship as specified in the contract. Instead, they delivered it to a customary waiting area for ships to be delivered to the recycling yard.

When lockdown was extended, NKD’s agent sent a notice to terminate the contract, claiming that lockdown restrictions constituted a force majeure that would prevent Bart from transferring title of the ship to NKD. Bart denied that the lockdown constituted a force majeure on the basis that transfer of title was not dependent on the ship arriving to the recycling yard in India. Bart considered the purported notice of termination a breach of contract (and of a repudiatory nature) which entitled Bart to treat the contract as terminated. Accordingly, Bart sold the ship to another buyer.

Although the circumstances of the case gave rise to various claims, the dispute was mainly about whether the imposition of the lockdown restrictions by the Government of India amounted to a force majeure.

Judgement

In NKD Maritime Ltd v Bart Maritime (No. 2) Inc. [2022] EWHC 1615 (Comm), the court concluded that transfer of title of the ship had occurred even though the ship was not delivered to the designated destination. Even if it was found that the title had not transferred, the court held that the lockdown restrictions did not amount to a force majeure as they would have merely hindered or delayed the delivery of the ship until the restrictions were lifted. They did not result in an inability to deliver the ship to the designated destination. Only if the restrictions were extended to a very long period of time would it have been the case that the “commercial adventure” between both parties was materially undermined.

Impact

This judgement sets a precedent that circumstances such as COVID-19 will not automatically form a reason for parties to walk away from their contractual obligations. The judgement also affirmed that concluding certain conditions as force majeure is not that simple. Parties will have to honour their contractual obligations even if unfavourable circumstances may drive higher execution costs. The court’s use of the term “materially undermining the commercial adventure”, a feature of the doctrine of frustration whereby a contract is automatically discharged where it becomes impossible to perform, sets the bar high for what might be considered as force majeure.

Whilst COVID-19 restrictions have significantly eased in recent months, the same principles may equally apply to new events which result in the imposition of widespread restrictions, such as the ongoing war in Ukraine. Many jurisdictions (including the U.K.) have recently introduced sectoral sanctions prohibiting various activities involving persons connected with Russia, Russian-affiliated entities or persons controlled by them. For more information on the sanctions, please see our separate advisory, published on 15 February 2022. These restrictions may result in contracting parties being unable to perform some or all of their contractual obligations. Armstrong Teasdale is experienced in advising on complex cross-border contractual arrangements, and we would be delighted to help assist with any questions.

Introduction of the Economic Crime (Transparency and Enforcement) Act 2022 and Register of Overseas Entities

The highly anticipated Register of Overseas Entities came into force in the U.K. on 1 August 2022 through the new Economic Crime (Transparency and Enforcement) Act 2022 (ECA). The clock is now ticking. Overseas entities have until 31 January 2023 to register their beneficial ownership details or potentially face significant sanctions under the new regime.

The ECA aims to deliver enhanced transparency about who ultimately owns and controls overseas entities that hold U.K. property.

We have tracked the progress of this legislation since its inception. To recap, any overseas entity that purchases, leases or grants security over U.K. land interests, which are either:

a. freehold; or

b. the subject of a lease for a contractual term in excess of seven years from the date of the grant;

in each case known as a ‘Qualifying Estate’, must register the details of their beneficial owners with the U.K.'s Companies House on a so-called 'Register of Overseas Entities' (Register).

An overseas company is one incorporated outside the U.K., including one of the Channel Islands, Isle of Man or Republic of Ireland. It also includes an overseas limited liability partnership or UK Economic Interest Grouping (UKEIG).

In relation to U.K. property already held by an overseas entity, the key takeaway is that the entity must provide details about its beneficial owners to Companies House before 31 January 2023 where the overseas entity holds a Qualifying Estate it acquired on or after 1 January 1999.

Overseas entities that disposed of a Qualifying Estate after 28 February 2022 will still be required to comply with the requirements of the Register and give details of those dispositions to Companies House.

Armstrong Teasdale is already assisting several of its U.K. property-holding clients in navigating the regime introduced by the ECA. The conditions and rules for identifying beneficial owners are complex and failure to comply could result in fines and imprisonment.

On an annual basis, overseas entities will be required to update the Register or confirm no changes in the information held on the Register.

HM Land Registry (HMLR) has issued guidance to overseas entities seeking to apply for registration or make a disposition on or soon after 5 September 2022. HMLR will start entering restrictions on registered titles of Qualifying Estates preventing disposals without the overseas entity having obtained an overseas entity ID or ‘OE ID’ and complying with the requirements of the ECA.

Next Steps

We strongly recommend overseas entities holding U.K. property contact us at this stage to start the process of compliance with the ECA regime well in advance of 31 January 2023. Any delay in complying with the requirements of the regime may delay property dealings or worse, result in civil and criminal sanctions under U.K. law.

For advice on how to navigate the requirements of the ECA, please contact Scott Hilton.

Directors’ Liability for a Company’s Negligence – Barclay-Watt v Alpha Panareti Public Ltd

In the recent case of Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169, the Court of Appeal considered whether a director of a company can be jointly liable in respect of the company’s negligent conduct.

The court held that the director in this case was not jointly liable for the negligent acts of the company. The decision should be of reassurance to company directors but should not be seen as allowing a director to escape liability in all circumstances. The courts will be unlikely to impose personal liability on a director simply because they have control or participate in the actions of a company and carries out the director’s duty. Nevertheless, should a director demonstrate a clear desire to commit harm to a third party, they may be held personally liable.

Background

The case concerned a Cypriot property developer, Alpha Panareti Public Ltd (APP), who marketed the sale of luxury properties in Cyprus to residents of the U.K. The individuals were not sophisticated investors and did not have a detailed understanding of financial matters. APP marketed the properties through a contractual arrangement with a third party, who in turn recruited salesmen who had previously advised the claimants where they had established a relationship of trust with them.

The claimants were sold packages involving the purchase of one or more apartments with a view to letting them to tourists in Cyprus. The packages included mortgage financing for the buyers, through loans denominated in Swiss francs, with the rent receipts expected to cover the cost of the mortgage. The availability of a cheap mortgage in Swiss francs was a key selling point and an important feature of the offer.

APP was controlled by two directors, Andreas Ioannou and his father. Ioannou was described by the court as being the “driving force” behind APP’s marketing plan.

Problems arose when the British and Cypriot currencies fell significantly against the Swiss franc, resulting in a spiralling of costs of the mortgages. None of the claimants were ever warned about the currency risks even though the Cyprus Consumer Council had highlighted currency risk in connection with an investigation into mortgages provided by the bank in question.

The claimants alleged that APP had made misrepresentations and gave negligent advice while marketing the properties and that Ioannou should be held personally liable, and also as a joint tortfeasor with APP.

The Judgment

The Court of Appeal upheld the lower court’s ruling that APP was negligent in marketing the properties without adequate warning of the currency risks involved.

Primary tortfeasor

The Court of Appeal noted that there are two ways in which a director may be liable under tort – either as a primary tortfeasor or as a joint tortfeasor. The lower court had ruled that Ioannou was not a primary tortfeasor, applying Williams v Natural Life Health Foods Ltd, on the basis that Ioannou had not assumed personal responsibility so as to create a special relationship between him and the claimants. Furthermore, the claimant must rely on such assumption. Based on the lower court’s findings, the claimants did not appeal this basis of liability, so the Court of Appeal only considered the claim that Ioannou was a joint tortfeasor with APP.

Joint Tortfeasor

A person who assists the commission of a tortious act by the primary tortfeasor is a “joint tortfeasor”. The leading case on accessory liability in tort is the decision of the Supreme Court in Fish & Fish v Sea Shepherd, whereby the court ruled that for the defendant to be liable, the following three conditions must be satisfied: (1) the defendant must have assisted the commission of an act by the primary tortfeasor; (2) the assistance must have been pursuant to a common design on the part of the defendant and the primary tortfeasor that the act be committed; and (3) the act must constitute a tort as against the claimant.

The Court of Appeal found that Ioannou was not liable as a joint tortfeasor. Although Fish & Fish v Sea Shepherd was recognised as the leading authority, the Court of Appeal noted that, unlike the situation with Ioannou, Fish & Fish v Sea Shepherd and similar cases had dealt with different types of torts and had not concerned a company director. Instead, when considering the personal liability of an individual director, the Court of Appeal said it was necessary to strike a balance between two main principles: (1) that individuals should be entitled to limit their liability by incorporating a company, which is a distinct legal entity, to carry on their business, and (2) a tortfeasor should not escape liability merely because they are a director of a company (put another way, whether a director whose conduct incurs personal liability should have a defence by reason of their status as a director).

Furthermore, the Court of Appeal held that statements of legal principle must be understood in the context in which they are made. That context includes the nature of the tort in any particular case. The torts applicable in Fish & Fish v Sea Shepherd were “strict liability” torts which do not require an assumption of responsibility. The tort of negligence, on the other hand, could not be committed unless a person assumed a duty of care.

The Court of Appeal found that in the case of Ioannou, there was insufficient “common design” (applying the second leg of Fish & Fish v Sea Shepherd) to deliberately withhold the information of the currency risk from the claimants to warrant personal liability. It was a case of negligent failure to warn, not deliberate deceit.

The Court of Appeal stated that the principles of accessory liability should be kept within reasonable bounds and that it should be possible to carry on a business by means of a limited liability company without exposing individual directors to liability. The court noted that Ioannou did not have personal dealings with the claimants or assume any personal responsibility towards them and did not himself commit the tort.

The Impact of the Judgment

To the relief of company directors, the judgement confirmed the key principle of English law that an incorporated company is a separate and distinct entity from its shareholders and directors, and therefore a director generally should not be personally liable for the tortious acts of their company. However, the Court of Appeal was careful to note that this protection must be balanced against the harm that may have been caused by a director and, therefore, is very dependent on particular facts.

A person committing tortious acts should not escape liability simply because they are a director of a company. Therefore, it will continue to be important for directors to act to maintain the integrity of their corporate entities, including:

  • observe company formalities and enter into contracts only through the corporate entity;
  • scrupulously keep records of shareholders and directors meetings (including all resolutions passed at such meetings) and of written resolutions passed in the absence of such meetings; and
  • perhaps most importantly, each director should refrain from personally assuming a duty of care to customers and other third parties.

If you have any queries or concerns regarding directors’ duties or liabilities, please contact Peter Kohl and Zuzanna Oldfield.

Public Company Secondary Capital Raising Review and Recommendations

The final report on the Secondary Capital Raising Review (the “Report”) was published by HM Treasury on 19 July 2022. The Report followed Lord Hill’s UK Listing Review in 2021, which aimed to explore changes to the U.K. capital markets and certain of the processes, procedures and regulations associated with those markets in order to facilitate ongoing fundraisings by listed companies.

Whilst the Report and its recommendations address a variety of areas, the broader narrative of the Report is the U.K. Government’s overall holistic review of U.K. capital markets and regulations, with a focus on increasing the competitiveness of the U.K. market and ensuring that the U.K. can compete on a global stage.

Areas of particular note and interest in the Report include:

  • Enhancing and Strengthening the Preemption Regime
    The Report highlights the importance of the principle of pre-emption and the need to properly preserve and enhance it, as it is a key shareholder protection for investors in the U.K. There are various proposed steps to be taken as part of this, including issuing revised investor guidelines which will increase the amount of shares that listed companies can regularly issue on a non-pre-emptive basis to new investors and other third parties. The proposals will also look to formalise the role of the Pre-Emption Group (PEG), a body that represents listed companies, investors and intermediaries, and issues best practice documents regarding authorities to disapply pre-emption rights and other guidelines on pre-emption rights. The proposals include revising PEG’s corporate governance guidelines, setting up a website for PEG, formalising the appointment process with PEG, as well as a review of PEG membership and its annual reporting processes.
     
  • Reducing Regulatory Involvement and Costs
    The Report focuses on various recommendations aimed at reducing or removing regulatory involvement in secondary fundraisings. As listed companies are already subject to rigorous continuing obligations and disclosure requirements, it is proposed that the regulatory involvement in secondary raisings can be reduced. There are recommendations directly dealing with increasing the fundraising threshold required for the publication of a prospectus, removing the need to appoint a sponsor in secondary capital raises, revisions to the Financial Conduct Authority’s (FCA) approach to working capital statements and reducing working capital diligence exercise requirements.
     
  • Increasing the Ability to Raise Funds More Easily and Cheaply
    The Report highlights that, for the U.K. capital markets to remain competitive, fundraising structures need to be quicker and cheaper in relation to implementation and access for companies. This includes recommendations to reduce minimum offer periods for rights issues and open offers, flexibility to reduce notice periods for general meetings, change scope for authorities to allot, update pre-emption provisions in the Companies Act 2006, changes to excess applications attached to rights issues and the ability to opt-in to a continuous disclosure regime to reduce due diligence required in fundraisings.
     
  • Increased Involvement of Retail Investors
    There is a focus in the Report on increasing the overall involvement of retail investors in fundraisings as well as noting the importance of retail investors in a more competitive U.K. market. Specific recommendations to address this are aimed at using technology to provide easier and better access for retail investors to fundraisings and other changes in relation to reducing the availability of a prospectus in a retail offer.
     
  • Drive to Digitisation
    There is a focus in the Report on a ‘Drive to Digitisation’. This is a broad recommendation regarding the provision of digital access to U.K. capital markets, specifically involving the implementation of a system whereby shares are fully digitised as well as a recommendation to set up a Digitisation Task Force.

Implementation

Whilst the preference is to implement some of these recommendations immediately, it is acknowledged that others will take longer to formalise and implement. HM Treasury has already begun the implementation of the Digitisation Task Force. However, the other recommendations (which will most likely be dealt with by the FCA, the U.K.’s Department for Business, Energy and Industrial Strategy, and PEG, as well as  HM Treasury) will most likely be dealt with in the next 12-24 months as they will involve engaging a variety of stakeholders.

The U.K. market is primed for change with the aim being more competitive capital fundraising to increase and attract investment. Armstrong Teasdale welcomes the recommendations and steps taken by various stakeholders in reviewing the market and looks forward to their codification and implementation over the coming months. We are confident these measures will only make the U.K. market an even stronger and more popular destination for investment.

For more details of the full set of recommendations for U.K. capital markets set out in the Report, please see our latest advisory, “Proposed Recommendations from the U.K. Secondary Capital Raising Review Final Report”.

Should you wish to discuss or require further information, please contact Joan Yu and Nick Heap.

Dwyer (UK Franchising) Ltd v Fredbar Ltd and Another [2022] EWCA Civ 889: The Court of Appeal Holds that a One-Year Noncompete Covenant is Unenforceable

Facts

Dwyer, a U.S.-based home services provider and franchisor of ‘Drain Doctor’, entered into a franchise agreement with Fredbar, granting Fredbar a license to use the ‘Drain Doctor’ branding and trade name to provide home draining services in Cardiff. The guarantor to the franchise agreement was Mr. Bartlett, the director and shareholder of Fredbar, who left his previous employment to focus solely on the franchise.

The duration of the franchise agreement was 10 years. However, during the first year, the franchise was not as profitable as Dwyer had expected. In the second year, Bartlett was in isolation for three months following the U.K. Government’s COVID-19 restrictions which put a pause on the franchise. A dispute arose between the parties as to whether this amounted to a breach of contract, and each party purporting to terminate the franchise agreement.

The franchise agreement contained a provision which stated that for a period of one year after the end of the franchise agreement, Fredbar would not (directly or indirectly) “be engaged concerned or interested in a business similar to or competitive with” the franchise business within the franchise territory or a radius of five miles of that territory. This provision constitutes a noncompete clause, a type of restrictive covenant or restraint of trade. Around the same time as Fredbar purported to terminate the franchise agreement, Bartlett set up a new competing business ‘Daily Drains’, which traded within the franchise territory and elsewhere. As a result, Dwyer applied to the High Court for an injunction to prevent Bartlett from proceeding with his ‘Daily Drains’ venture.

Under English law, to be enforceable, a restrictive covenant must be reasonable by reference to the legitimate interests of the parties concerned as well as the interests of the public. The courts will usually consider factors such as what the covenant aims to achieve, its duration and scope and each party’s respective bargaining powers. The High Court refused to grant the injunction, holding that the noncompete covenant was unreasonable for numerous reasons. Dwyer appealed this decision.

Judgment

The Court of Appeal upheld the High Court’s decision, finding the noncompete covenant unreasonable and therefore unenforceable.

The Court of Appeal looked at each party’s circumstances whilst assessing reasonableness, particularly the bargaining power of the parties, as Dwyer was a major established business, whilst Fredbar was run by Bartlett, a sole shareholder with barely any plumbing experience who had invested most of his assets into the franchise. There was no evidence that the parties had negotiated the noncompete covenant to take these facts into account.

The judge also found that both parties objectively knew that there would be much less need to protect Dwyer’s goodwill if the contract ended early than if it ended after many years of success. The one-year noncompete was not necessary to protect Dwyer’s legitimate interests in an early termination situation and was found to be unenforceable. The judge noted that “it would have been better to draft the restrictions so that their duration depended on how long the franchise agreement lasted prior to termination”.

Impact

Although the courts in England usually view franchises as nearer to business sales rather than employment relationships (therefore upholding one or two-year restrictions), this judgment shows the English courts flexibility in departing from this view.

When drafting such a covenant in an English law governed agreement, several points should be considered, such as:

  1. the difference in bargaining power of the parties;
  2. how the person giving the covenant is benefitting from it;
  3. the scope and duration of the covenant;
  4. whether the covenant applies during or after the contract; and
  5. if the covenant accommodates different outcomes (i.e., early termination).

In the U.S., the enforceability of a noncompete varies depending on the applicable jurisdiction and other factors. While courts in some U.S. states usually afford more deference to a noncompete in a franchise context as compared with an employment context and uphold one to two-year restrictions, courts in other states, sometimes pursuant to state statutes, provide no such deference and hold that most or all noncompetes in a franchise context are unenforceable, irrespective of the duration of the restriction.

When drafting a noncompete in a U.S. law-governed agreement, given the significant variation with respect to the statutory and case law among U.S. states, careful consideration must be provided with respect to the governing state law. Among the states that generally find reasonable noncompete restrictions to be enforceable, the factors for determining reasonableness vary, but they often include:

  1. the duration of the noncompete restriction;
  2. the geographic area to which the restriction applies;
  3. the scope of activity being restrained;
  4. whether the restriction is narrowly tailored to protect a legitimate business interest; and
  5. whether the noncompete violates any public policy.

How can Armstrong Teasdale help?

Armstrong Teasdale is well versed in guiding and assisting clients in relation to cross-border franchise matters including franchise acquisitions. Our franchise teams in the U.S. and U.K. have extensive experience representing both franchisors and franchisees. If you require advice on a franchise arrangement, please contact Rob Mahon.

The Prospect of “Data Objects” as a New Category of “Personal Property” under English Law?

In July 2022, the Law Commission published its wide-ranging and detailed consultation paper (stretching to 549 pages) on a new and proposed approach to regulating and protecting digital assets (Consultation).

In the Consultation, the U.K. Government has asked the Law Commission for recommendations as to how it can “ensure that digital assets benefit from consistent legal recognition and protection” in a way which enables technological and financial innovation.

One of the steps in doing this is to bring cryptoassets under the English definition of ‘personal property.’

Read more about digital assets and the emerging framework for personal property.

What are “digital assets”?

“Digital assets” is, rather obviously, the best way of describing assets which can be represented digitally. Cryptoassets are a type of digital asset, which are described as a digital representation of value or contractual rights that can be transferred, stored or traded electronically, and which typically use cryptography, distributed ledger technology (DLT) or similar technology.”

This might include cryptocurrencies, crypto tokens and non-fungible tokens (NFTs) – which are all classed (generally) as digital assets. With the market (and interest in) digital assets enjoying a recent explosion, law makers and regulators are now under no illusions that they are here to stay.

What is “personal property”?

English law currently categorises personal property in one of two ways:

  1. Things in possession (something which is); and
  2. Things in action (something “which can only be claimed or enforced by action, and not by taking physical possession,” such as “debts, rights under a contract, rights or causes of action, shares, intellectual property, equitable rights and leases”).

As digital assets do not fit perfectly within these two categories, the Consultation proposes to add a third category of personal property to English law – “data objects.”

The Law Commission has summarised that, in order for data objects to attract property rights under this new, third category, they must:

  1. “be composed of data represented in an electronic medium” (such as “in the form of computer code, electronic, digital or analogue signals”);
  2. “exist independently of persons” (something which exists “there in the world”, separate from a person, e.g., “personalities and unsevered body parts”) and exist independently of the legal system” (rights which are not asserted by legal action, such as under contract); and
  3. be “rivalrous” (the person who possesses the item prevents its use by another).

How will “digital assets” fit into the third category of “data objects”?

It must be recognised that this is an open consultation until early November 2022 and, as noted above, is a very broad and granular analysis of the existing legal position in England and Wales. Among other things, it explores the legal nature of digital assets such as crypto tokens.

However, with there being so much movement in the world of regulation (particularly in the U.S.) and the principles of personal property rights in respect of cryptoassets having already been tested in the English courts over the last five years, the U.K. Government will be eager to begin legislating effectively in this area.

Relatively recent judgments have made for some interesting treatment of cryptoassets. A useful assessment was given by Bryan J in AA v Persons Unknown stating that cryptoassets “meet the four criteria” of property as set out by Lord Wilberforce inNational Provincial Bank v Ainsworth,being that cryptoassets (the topic of this particular case being Bitcoin) are:

  1. definable;
  2. identifiable by third parties;
  3. capable in their nature of assumption by third parties; and
  4. having some degree of stability or permanence.

Other judgments have also displayed a pattern (which has been observed in the Consultation) of the English courts showing an intention of “carving-out a category of personal property that is distinct from things in possession and from things in action.” This in turn appears to mark a desire to adapt the existing legal framework for the sake of innovation, which will seemingly be reflected by upcoming legislation and other regulatory instruments.

Should you be interested in additional information, please contact Zane Shihab and Matt Santer.

Is the Recession Coming and is it Time to Prepare?

What goes up must come down”. Physicist Sir Isaac Newton was describing gravity when he made that statement more than three centuries ago. However, this feels very representative of the current outlook of the U.K. economy.

After the initial boom due to the post-pandemic bounce back, pressure on U.K. businesses has been rising for several months now as result of a culmination of factors. These include supply chain issues, rapidly rising inflation (possibly peaking at 20% in 2023), significant interest rate rises and the shock of soaring energy prices caused by the war in Ukraine.

Accordingly, a recent Bank of England forecast on 4 August 2022 calls for a full-blown recession. Such a forecast seems to be in line with the Insolvency Service’s recent figures which have shown that the number of company insolvencies in Q2 of 2022 was 13% higher than in Q1 of 2022 and 81% higher than in Q2 of 2021. If these trends continue, this will inevitably put significant pressure on many businesses, some of which are still recovering from COVID-19 and the subsequent lockdowns.

The most prudent of these businesses will start to consider their position in the market, and look at what restructuring and insolvency options are available (whether as a debtor or a creditor) in anticipation of the upcoming economic outlook. This may not only be necessary but may also ensure the successful survival of a business.

Given this backdrop, all stakeholders should start to prepare themselves for what’s about to come and start thinking of strategies that can be employed now in order to mitigate and minimise risks and issues they are likely to encounter.

You may not think that you or your counterparty is/will be in financial trouble. If either of you are subject to the following warning signs, you should consider what options are available:

  • a lower-than-expected bank balance;
  • surprising use of an overdraft facility;
  • lower profit margins;
  • on-going cash flow problems;
  • high interest payments;
  • defaulting on bills;
  • extended creditor or debtor payment days;
  • falling margins; or
  • increasing stress levels among staff.

According to the forecasts and predictions, a recession seems likely around the corner. As such, openness and clarity with employees, clients and debtors/creditors (as applicable) are key factors to weathering the oncoming storm. Further, businesses that are proactive in both their communication and managing their finances by engaging professional advisers at a very early stage will be best set to overcome the likely challenges ahead.

Businesses in these circumstances, who engage professional advisers, will be helped by those advisers to navigate potential legal scenarios. This may include:

  • director’s duties advice;
  • enforcement options and defence strategies;
  • clawback transactions;
  • tactics to deploy for potential workout/turnaround strategies; and
  • nuances and intricacies of working through a business insolvency.

AT is well placed to help you in this regard. Lawyers in Armstrong Teasdale’s Restructuring, Insolvency and Bankruptcy practice have appeared and practiced in virtually every federal jurisdiction in the U.S. as well as the U.K., and have been chosen to represent lenders and other secured creditors, unsecured creditors’ committees, ad hoc committees, boards of directors, insolvency/bankruptcy practitioners (receivers, trustees, administrators and liquidators) and corporate debtors in bankruptcy/insolvency proceedings and reorganizations. Our team has experience working on a wide range of domestic and cross-border matters including advisory, transactional and contentious work with a particular focus on the automotive, food, manufacturing, financial services, real estate, oil and gas, and retail and leisure sectors.

Should you wish to discuss or require further information, please contact Imran Aslam and Sebastian Clark.

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