Directors duties and corporate transactions

Transcription

1 Directors duties and corporate transactions GLAFKOS TOMBOLIS ADAM KUAN 17 / 09 / 2014

2 Agenda Overview of the UK legal environment for directors Directors duties and obligations at each stage of a typical M&A transaction: Marketing the business for sale Due diligence investigations Entering into heads of terms and exclusivity Negotiating and signing the deal Practical tips: how can directors protect themselves? _2

3 Directors are operating in an increasingly complex legal environment More pressure on companies to be responsible corporate citizens, resulting in directors becoming accountable to a broader range of stakeholders The duties, obligations and liabilities of company directors are numerous and widely dispersed: _3 Companies Act 2006 Financial Services and Markets Act 2000 Financial Services Act 2012 Tax (Corporation Tax, VAT) Environmental law (Control of Pollution Act 1974, Environmental Protection Act 1990) Bribery Act 2010 Employment law Health and Safety at Work Act 1974 Insolvency Act 1986 Competition law (Enterprise Act 2002) Theft Act 1968 Fraud Act 2006 Data Protection Act 1998 Common law Proceeds of Crime Act 2002

4 _4

5 The legal environment for directors involved in corporate transactions: an overview 1. The Companies Act 2006 (CA 2006) Directors duties are codified in Part 10 of the CA These general duties replaced the previous common law and equitable rules on directors duties, although regard still needs to be had to those when interpreting and applying the statutory duties. The general duties are: Duty to act within powers (s.171) Duty to promote the success of the company subjective test (s.172) Duty to exercise independent judgement (s.173) Duty to exercise reasonable skill, care and diligence - objective and subjective test (s.174) Duty to avoid conflicts of interest (s.175) Duty not to accept benefits from third parties (s.176) Duty to declare interests in proposed transactions or arrangements with the company (s.177) _5

6 Overview of legal environment, cont d Duties of directors owed to the company (and not shareholders individually, although see below) For the most part, it is the company s right to claim against a director for breach of duty Derivative claims procedure in Part 11 CA 2006 (court-approved) Unfair prejudice s.994 CA 2006 Shareholders can ratify a directors breach of duty s.239 CA 2006 Also informal authorisation by shareholders before the event Re Duomatic 2. Duties owed to shareholders directly General proposition: directors do not owe duties to the shareholders directly (Percival v. Wright [1902]) _6 However case law suggests that, where special factual circumstances exist, a fiduciary relationship may arise between directors and shareholders, and the directors may be found to owe certain duties to shareholders directly, for example: (i) a director induces shareholder to sell their shares at an undervalue (ii) directors have duty to be honest and not mislead when supplying information about a takeover

7 Overview of legal environment, cont d 3. Financial Services Act 2012 (s.89) A director commits a criminal offence if he/she: makes a statement (knowingly or recklessly) which is false or misleading in any material respect; or dishonestly conceals any material facts whether in connection with a statement made by him/her or otherwise, if he/she makes that statement or conceals the fact with the intention of inducing (or is reckless as to whether the statement or concealing induces) another person to enter into, or refrain from entering into a relevant agreement (which includes an agreement to buy or purchase shares) s.90 FSA 2012 Offence of creating a misleading impression as to the price or value of a relevant investment (including shares) _7

8 Overview of legal environment, cont d 4. Negligent misstatement at common law A claim for damages could be brought against a director where: the director makes a negligent statement which causes the claimant economic loss; and the director owed the claimant a duty of care. Also bear in mind negligent misrepresentation although this requires a contractual relationship 5. Fraud A claim could be brought at common law under the tort of deceit, or under the Fraud Act Financial Services and Markets Act 2000 (FSMA), s.21: Prohibition on financial promotions A person must not, in the course of business, communicate an invitation or inducement to engage in investment activity or in other words, issue a financial promotion, unless: the person is authorised under FSMA; the content of the communication is approved by an authorised person; or _8 the communication is covered by an exemption

9 Marketing the business for sale Techno Media Ltd, a UK private company, engages Square the Circle Advisors (SCA), a corporate advisory boutique, to help it market the company for sale. With assistance from Techno Media s directors, SCA prepares an information memorandum (IM), which is distributed to 20 of SCA s contacts and clients, being mostly mid-sized UK-based PE funds. Amongst other things, the IM states that Techno is the UK s leading digital marketing agency and its directors are as certain as can be that the company will be EBITDA positive in Q At presentations set up by SCA for a number of potential buyers, SCA and Techno s CEO and COO provide details of Techno s key customer contract terms and employees. None of those attending the presentation (or indeed who have received the IM) have signed a confidentiality undertaking. About 5 months later, a deal is concluded with one of the PE funds that attended the meeting. _9

10 Marketing the business for sale, cont d Misleading statements Financial promotions Public offers of securities s.755 CA 2006 s.85 FSMA Economic torts Data protection _10

11 Entering into heads of terms and exclusivity So long as directors (of both buyer and target) are acting in good faith, have taken appropriate advice and disclosed any personal interest in the proposed transaction in accordance with CA 2006 and articles/any shareholders agreement, they are unlikely to be in breach of their statutory duties But, there are areas of vulnerability: Payment of break fees by target/reverse break fees by purchaser Long exclusivity period without fiduciary out Target board disclosing potential deal to target shareholders Committing the target/buyer to a transaction at heads stage through careless drafting _11

12 Due diligence investigations Unlawful dividends Defective share buybacks even if only technical Intra-group transfer of assets at less than market value or without approvals under articles/shareholders agreement Payments to/other benefits received by non-shareholders Transactions with directors and their connected persons Proceeds of Crime Act and criminal property _12

13 Negotiating and signing the deal The founder and principal shareholder of Techno (who, under the terms of the proposed deal, will receive a 8 year earn-out) had a medical check up 3 months ago and was advised that he had an irregular heart beat and there was evidence of furring of his arteries. Since the negotiations began with the PE fund, he has experienced occasional chest pains. Given that negotiations are advanced, he contacted Techno s principal customer, BudJet (a low-cost airline), to tell them about the potential deal. BudJet represented 30% of Techno s revenues in BudJet s marketing director expressed his concern over the telephone that the PE fund has a significant investment in BudJet s main competitor and that BudJet would obviously need to consider its contractual position going forward. BudJet s contract with Techno contains a change of control provision for the benefit of BudJet. The exclusivity period has ended and the target board has received a competing offer. _13

14 Negotiating and signing the deal, cont d Concealment of material facts s.89 FSA 2012 and Fraud Act Breach of confidentiality undertaking in exclusivity agreement Fraudulent misrepresentation Liability under SPA Target directors considering competing offers higher price or lower leverage? _14

15 Remedies for breach and ratification Relevant duty or liability Consequences of breach Can shareholders ratify the breach? General duties of directors under CA 2006 Transaction or relevant corporate act may be voidable or even void Director may be liable to account for any profits made from breach of duty An action for damages brought by the company (for breach of duty of skill and care) Injunction to prevent a particular course of action In most cases, shareholders can ratify directors breaches of duty May not be possible where act was: ultra vires the company; fraud or oppression of the minority dishonest, or involved misappropriation of company property In some cases, criminal liability Financial Services Act 2012 (s89) Criminal liability No Financial Services and Markets Act (s21) Criminal liability No Negligent misstatement, fraud or claim under SPA Action for damages Criminal liability for fraud No _15

16 Practical steps: how can directors protect themselves? All key decisions of the directors (of either buyer or target) should be recorded clearly in board minutes. Where necessary, board minutes should include reasons for the directors decisions, including why they think that the transaction will promote the success of the company for the members as a whole Obtain professional advice (including legal advice) where appropriate, in particular in relation to technical issues and high value transactions Delegate with caution. Directors must supervise exercise of delegated functions Directors of the target/buyer should ensure that all statements made about the target/buyer are true and not misleading Be careful not to create any special fiduciary relationship directly with shareholders. Avoid assuming responsibility for the sale of any shareholder s shares, or making representations to the shareholders in relation to the sale _16

17 Practical steps, cont d Directors should ensure that any personal interest or conflict in relation to the transaction is disclosed to the board, and where appropriate, authorised by the other directors and/or the shareholders Where appropriate, and if in doubt, make full and fair disclosure to the shareholders, particularly about any matters involving conflicts of interest or potential breaches of duty. A shareholder resolution will cure most (if not all) ills For director-shareholders, appropriate protections should be included in the transaction documents (limitations on liability, entire agreement clause, etc.). Ensure that all material issues are included in the disclosure letter Ensure that appropriate D&O liability insurance is in place, and consider whether the company should indemnify directors (note, any indemnity will need to comply with the CA 2006) The bottom line: a director who is honest; not incompetent; tries his/her best to exercise sound business judgment; discloses any relationship with the contracting party; ensures that the company complies with its obligations; and obtains professional advice should not be concerned _17