UK: CORPORATE FEBRUARY 2015

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1 BRIEFING UK: CORPORATE FEBRUARY 2015 WILL UPCOMING COMPANY LAW CHANGES AFFECT YOUR COMPANY? WILL IMPENDING STAMP DUTY CHANGES IMPACT ON A PLANNED TAKEOVER OR SCHEME OF ARRANGEMENT? COULD YOUR COMPANY RESPOND TO A REQUEST FOR ACCESS TO THE REGISTER OF MEMBERS? New rules in relation to company and business names...1 Takeover offer or scheme of arrangement? Stamp duty changes imminent..1 Company law changes in the pipeline.2 Access to the register of members..5 Contacts 6 NOTE FROM THE EDITOR Our first Corporate Briefing of the year covers a number of company law developments, which are relevant to all UK companies, as well as the announcement made by the Chancellor on 3 December 2014 that regulations are to be made to prevent the use of cancellation schemes of arrangement on takeovers as a means of saving stamp duty. This may make the use of a scheme of arrangement instead of a conventional offer less attractive going forward. In terms of company law developments, we consider some deregulatory changes to company and business names regulation which came into force on 31 January 2015, as well as further consultations on the proposed ban on corporate directors and the much-discussed new beneficial ownership register to be introduced under the Small Business Enterprise and Employment Bill. We also take a look at a Court of Appeal case from last year on prevention of access to the register of members, which is of interest as, under the Companies Act 2006 (CA 2006), any person may make a request to a company to inspect or receive a copy of its register of members (or any part of it) and the company only has a very short time limit within which to respond. Nick Fothergill Corporate Group

2 1 Watson Farley & Williams New rules in relation to company and business names THE CHANGES ARE INTRODUCED AS PART OF THE GOVERNMENT S RED TAPE CHALLENGE, AIMING TO HELP COMPANIES GROW AND REDUCE THE ADMINISTRATIVE BURDENS New regulations came into force on 31 January 2015 which simplify company and business name regulation Two new regulations amend the rules relating to company names and trading disclosure requirements. The changes have been introduced as part of the Government s Red Tape Challenge, aiming to help companies grow and reduce the administrative burdens facing companies on incorporation or when changing a company name. Sensitive words and expressions The Company, Limited Liability Partnership and Business Names (Sensitive Words and Expressions) Regulations 2014 reduce the number of words and expressions specified as sensitive by 26 words. Amongst the words removed are Authority, Board, European, Group, Holding, National, International and United Kingdom. This change should allow groups of companies to choose similar names without the delay of seeking prior approval from the Secretary of State and other Government bodies. The regulations came into force on 31 January 2015 and apply to companies, limited liability partnerships and other businesses seeking to change their name or register a name on incorporation from that date. Names and trading disclosures The Company, Limited Liability Partnership and Business (Names and Trading Disclosures) Regulations 2015 consolidate and replace five existing sets of regulations and also came into force on 31 January The key changes include: Reduction of same as list the regulations amend the list of words to be considered or disregarded when determining whether a proposed name is the same as another. Words that have been removed from the list are Exports, Group, Imports, International, Holdings and Services. This should make it easier for groups of companies to choose names without being considered the same as another company within the group whilst not misrepresenting the company s position in the eyes of the public; Permitted characters the regulations permit a wider range of characters, signs, symbols and punctuation to be used in a company name, including various accents and other diacritical marks; Requirement to display company name at the registered office the regulations amend the trading disclosure requirements where at least six companies operate from or are registered at one office, place or location, so that it is no longer necessary to display each company name. The registered names may now be held at the office on a register and be made available for inspection on request. Takeover offer or scheme of arrangement? Stamp duty changes imminent A scheme of arrangement structured as a cancellation scheme (as opposed to a transfer scheme), with its stamp duty saving advantage, will not be available for use much longer on a company takeover In practice, a large number of recommended takeovers are effected by scheme of arrangement under the CA 2006 rather than by the conventional offer process governed by the City Code on Takeovers and Mergers (Code). There are a number of advantages to a scheme as opposed to an offer, including, until now, potentially a quite substantial stamp duty saving where the value of the target is

3 UK: Corporate Briefing 2 considerable and a cancellation scheme (also known as a reduction scheme) is used. On an offer, there is generally a requirement to pay stamp duty at the rate of 0.5% of the value of the consideration on transfer of the shares, although, since 28 April 2014, no stamp duty has been payable on the transfer of shares in companies traded on AIM (provided they are not also listed on a Recognised Stock Exchange (a list of which is maintained by HM Revenue & Customs)). Where a transfer scheme of arrangement is used (where shares in the target company are transferred to new owners), stamp duty at that rate is also payable. By contrast, no stamp duty has been payable if a cancellation scheme of arrangement has been adopted (which involves a reduction of capital) because there is no transfer or agreement to transfer the shares in the target, instead the existing shares of the target are cancelled by virtue of a court order and new shares in the target are issued to the bidder. THE GOVERNMENT HAS INDICATED THAT IT WISHES TO PUT THE NEW LEGISLATION IN PLACE AS SOON AS POSSIBLE, IN ORDER TO LIMIT THE SCOPE FOR COMPANIES TO BRING FORWARD TAKEOVERS IN ORDER TO CIRCUMVENT THE LEGISLATION However, this advantage is about to change. On 3 December 2014, the Chancellor announced in his Autumn Statement that the Government plans to prevent the use of cancellation schemes on takeovers as a means of saving stamp duty, on the basis that it believes that takeover structures that achieve the same outcome should have the same stamp duty treatment. Takeovers effected by means of a transfer scheme of arrangement will not be affected. Draft regulations to implement this change were published in mid-january These amend the CA 2006 to prohibit a reduction of capital as part of a scheme on a takeover, with a specific exemption for circumstances where the acquisition amounts to a restructuring that inserts a new holding company into a group structure and where there is no substantial change in the ultimate shareholders in the company. The Government has indicated that it wishes to put the new legislation in place as soon as possible, in order to limit the scope for companies to bring forward takeovers in order to circumvent the legislation, so the regulations will come into force the day after the day on which they are made, which is expected to be in early Transitional provisions will apply to restrict the application of the regulations so that they only apply to takeovers announced on or after the date that the regulations come into force or, where the offer is not subject to the Code, to takeovers where the terms are agreed between the parties on or after the date that the regulations come into force. Takeovers already in progress at that date will not, therefore, be affected. For many companies, this change will remove one of the key attractions of using a scheme of arrangement instead of an offer, although a number of other considerations, such as the certainty of gaining 100% control and the fact that a prospectus or equivalent document is less likely to be required (although a circular to shareholders will be required), may still make a transfer scheme of arrangement the preferred choice. For many AIM companies, there will be no impact, as the stamp duty saving advantage was lost back in April. Company law changes in the pipeline Further details have been published in relation to proposed company law changes to be introduced by the Small Business, Enterprise and Employment Bill (Bill), including as to timing. All companies will be affected by at least some of the changes proposed In our last Corporate Briefing, we outlined the key proposed changes to company law contained in the Bill, which is currently before Parliament. All companies will be affected by at least some of the changes as the measures will change legal requirements on companies, including what they file with Companies House.

4 3 Watson Farley & Williams Consequently, this will impact on companies systems and processes. Since then, there has been further clarification on expected timing and further consultation in relation to possible exceptions to the proposed ban on corporate directors and the proposed new beneficial ownership register. AT PRESENT, UK COMPANIES ARE PERMITTED TO HAVE CORPORATE DIRECTORS SO LONG AS ONE DIRECTOR IS A NATURAL PERSON. THE BILL PROPOSES TO PROHIBIT THIS GENERALLY, BUT TO PROVIDE FOR CERTAIN EXCEPTIONS Timing The Department for Business, Innovation & Skills (BIS) has indicated that, subject to the will of Parliament, implementation of the Bill will take place in three main stages. The highest impact changes will be introduced in the third stage. Bearer shares will be abolished two months after Royal Assent of the Bill, with a nine month period to surrender existing bearer shares. The second stage, to take effect in October 2015, will include changes such as the accelerated process for striking companies off the register and the introduction of the prohibition on corporate directors, with a 12 month grace period for any existing corporate directors. The final stage will be phased. Companies will be required to keep a beneficial ownership register from January 2016 but will not need to file this information at Companies House until April 2016 (providing three months in which to obtain and hold the required information (see further below)). Changes to the annual return process, statements of capital and company registers for private companies will also come into effect in April Exceptions to the proposed ban on corporate directors At the end of November 2014, BIS published a consultation paper on the circumstances where use of corporate directors of UK companies should be allowed. At present, UK companies are permitted to have corporate directors so long as one director is a natural person. The Bill proposes to prohibit this generally, but to provide for certain exceptions. A corporate director is a legal person (such as a company), as opposed to a natural person director (an individual). BIS is proposing to exempt UK companies with a regulated market listing or trading on a prescribed market (such as AIM) from the prohibition, on the basis of existing corporate governance and transparency requirements. An equivalent exception is proposed for UK companies with overseas regulated market listings that are subject to similar corporate governance and transparency rules in those countries. The paper also seeks views on the extent to which these exceptions should apply to subsidiaries of such companies - including whether it should just apply to dormant or wholly owned subsidiaries or other subsidiaries - and what restrictions might apply to any such corporate director (e.g. whether only group companies should be appointed as a corporate director, and whether all directors of such a corporate director (or the parent company in a group) should be individuals). In relation to unlisted public companies (plcs) and private companies, the consultation asks whether an exception should apply to: (1) all plcs, only large plcs, or only large plcs in a corporate group, and (2) all large private companies or only large private companies in group structures. Where there are group structures, the paper seeks views on the extent of the application of an exception for subsidiaries in the same way as for listed companies. It is not proposed to provide any particular exception for small or medium sized private companies. The consultation also considers other entities such as Societas Europaea, charitable companies, corporate trustees of pension funds and open ended investment companies. In relation to limited liability partnerships (LLPs), BIS is not proposing to change the existing regime, which permits the appointment of corporate members, but proposes to review the position alongside the general five

5 UK: Corporate Briefing 4 yearly review of the corporate director prohibition provided for by the Bill (or earlier if evidence of abuse of LLPs by corporate directors emerges). IT WILL BE A CRIMINAL OFFENCE TO PURPORT TO APPOINT A CORPORATE DIRECTOR UNLESS IT FALLS WITHIN THE SCOPE OF EXCEPTIONS. The prohibition and exceptions would apply to new directors appointed after the relevant provisions come into force and to existing corporate directors following the expiry of the 12 month grace period. It will be a criminal offence to purport to appoint a corporate director unless it falls within the scope of the exceptions. Where an exception applies, and a corporate director is appointed, it will still be the case that one director must be a natural person. New beneficial ownership register BIS published, at the end of October 2014, a discussion paper on the proposed new publicly accessible central register of the individuals who ultimately own and control UK companies - referred to as people with significant control over the company (PSCs) in the Bill. The Bill requires UK companies to obtain and hold information about their PSCs. PSCs are defined as individuals who directly or indirectly own or control more than 25% of the company s shares or voting rights, who are able directly or indirectly to appoint or remove a majority of the directors or who exercise some other form of significant influence or control over the company. An obligation is placed on companies and individuals to ensure the information is obtained and kept up to date and companies must hold this information in a register and keep it available for inspection (the PSC register). The information must also be provided to Companies House where it will, with limited exceptions, be maintained on a public central PSC register. Criminal penalties will apply to companies and individuals who fail to provide information or provide false information. The Bill provides the framework for the register but much of the detail, for example as to how the PSC register will work, will be set out in secondary legislation. The discussion paper sought views on the guidance (statutory and non-statutory) that will be required to help companies, individuals and others understand the new requirements. The Bill expressly requires the Secretary of State to publish guidance about the meaning of significant influence or control. The paper also sought views on the production of wider guidance, for example on the other conditions of being a PSC and the way PSC information must be obtained and held. It also invited comment on key areas to be dealt with in secondary legislation, namely the way in which the nature of a PSC s control over a company should be recorded on the PSC register and protection of certain PSC data from disclosure (for example, the usual residential address of a PSC or, in exceptional circumstances, a wider range of personal information). In a ministerial statement published in mid-january 2015, the Government confirmed that a working group will be established to oversee the development of the general guidance and an expert working panel will draft the statutory guidance. In relation to recording control on the PSC register, it indicated that people will be required to state which one or more of the specified conditions for being a PSC they meet. The Government will continue to consider the area of protection of PSC data from disclosure in exceptional circumstances, but is minded to limit those able to apply for protection to individuals at serious risk of violence or intimidation as a result of a company s activities.

6 5 Watson Farley & Williams Access to the register of members Burry & Knight Limited & Another v Knight [2014] EWCA Civ 604 UNDER S116 CA 2006, ANY PERSON MAY REQUEST ACCESS TO A COMPANY S REGISTER OF MEMBERS... This case marks the first occasion on which the Court of Appeal (CoA) has considered prevention of access to the register of members of a company under s117 CA It highlights the circumstances in which the court may prevent access following application of the proper purpose test under s117(3) and provides guidance on how the court will apply this test in practice Under s116 CA 2006, any member (without charge) and any other person (on payment of a prescribed fee) may request access to a company s register of members, which request must include the purpose for which the information will be used. Under s117(1), a company has five working days from receipt of the request to either comply with the request or refer it to the court. Under s117(3), the court will grant a no-access order directing the company not to comply with the request if it is satisfied that the application is not sought for a proper purpose. The meaning of proper purpose, not being defined in statute, was addressed in Burry v Knight. In Burry v Knight a minority shareholder applied for access to two companies registers of members under s116. The purpose of the request was threefold: (i) to study the current shareholders of both companies; (ii) to write to the shareholders regarding past conduct of directors; and (iii) to raise concerns about the proposed method of valuation of the companies shares. The CoA upheld the decision of the lower court in denying access under s117, on the basis that if one of the purposes of a request is improper then access to the register of members must not be granted ((i) and (ii) having been found to be improper purposes and (iii) having been found to be a potentially proper purpose). Despite denying access, the CoA did make an order known as a Pelling Order enabling the applicant to communicate with the other shareholders regarding his specific concerns whilst keeping the register of members private, thereby effecting the proper purpose but denying the improper purposes. Some other notable points arising from the CoA s judgment in Burry v Knight which provide guidance on the proper purpose test in s117(3) include the following: the onus is on the company to prove on the balance of probabilities that the purpose of an application is improper; it is not possible to provide an exhaustive list of proper purposes, but the words should be given their ordinary, natural meaning. The guidance issued by the Institute of Chartered Secretaries & Administrators in 2009 (ICSA Guidance) on the proper purpose test is helpful, although nonbinding; access requests by shareholders will generally meet the proper purpose test if they relate to the shareholder s interest and/or to the exercise of shareholder rights; when considering the purpose of a request, the court is not restricted to the purpose stated in it; and Pelling Orders may still be used where a request contains proper and improper purposes.

7 UK: Corporate Briefing 6 COMPANIES SHOULD VERIFY THAT THEY HAVE SYSTEMS IN PLACE TO ENABLE THEM TO RESPOND TO AN ACCESS REQUEST... From a practical perspective, companies should verify that they have systems in place to enable them to respond to an access request under s116 CA 2006 within the statutory five working day limit and should bear in mind the court s findings in Burry v Knight as well as the ICSA Guidance when deciding whether or not to contest access. Companies should note that non-compliance with a request for access, in the absence of a court order, will make the company and every officer in default liable to a fine, and for continued contravention, a daily default fine. CONTACTS Should you like to discuss any of the matters raised in this Briefing, please speak with a member of our team below or your regular contact at Watson Farley & Williams. JAN MELLMANN jmellmann@wfw.com FELICITY JONES fjones@wfw.com MARK TOOKE mtooke@wfw.com NICK FOTHERGILL nfothergill@wfw.com DEARBHLA QUIGLEY dquigley@wfw.com CHARLES WALFORD cwalford@wfw.com CHRISTINA HOWARD choward@wfw.com MARTIN THOMAS mthomas@wfw.com CHRIS KILBURN Partner, Singapore ckilburn@wfw.com All references to Watson Farley & Williams and the firm in this publication mean Watson Farley & Williams LLP and/or its affiliated undertakings. Any reference to a partner means a member of Watson Farley & Williams LLP, or a member or partner in an affiliated undertaking, or an employee or consultant with equivalent standing and qualification. The transactions and matters referred to in this publication represent the experience of our lawyers. This publication is produced by Watson Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have question or comments on its subject, please speak to your usual contact at Watson Farley & Williams. This publication constitutes attorney advertising LON NW NW 02/02/2015 Watson Farley & Williams 2015 wfw.com