Good Company. Welcome to the latest edition of Good Company. AIM Rules: Changes. AIM Rules for Nomads Rulebook

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1 Autumn 2006 / Issue 16 Goo Company Eitor: Julie Albery julie.albery@echert.com In this issue Corporate News p1 AIM Rules: Changes p2 Private Equity Focus p3 Without Prejuice Beware p3 Companies Act 2006 Welcome to the latest eition of Goo Company. In this issue, we outline the LSE s propose changes to AIM s regulatory environment through the introuction of a new rulebook, the AIM Rules for Nomas. Whilst the rulebook largely restates the existing obligations, aitional new rules are inclue (incluing a requirement for nomas to submit an annual return to the LSE, involving the provision an upating of information in relation to the work a noma performs on AIM). In our regular Private Equity Focus column we examine the recent HMRC guiance on the tax treatment of managers shares in venture capital an private equity backe companies, an give our view of the effect of the revise guiance on the private equity market. There is also a review of a recent case concerning the use of the phrase without prejuice in an agreement, an the practical effect of such ecision on future rafting of such provisions. Finally in this issue, we iscuss some points to note in relation to the Government s reform of corporate law. The new Companies Act receive Royal Assent on 8 November. Further upates on particular aspects of the reforms will continue to be circulate over this perio of change. AIM Rules: Changes By Chris Brierley On 2 October, the Lonon Stock Exchange (LSE) publishe a consultation paper on changes to the AIM Rules. The main proposal is for the creation of a new rulebook specifically for nominate avisers (Nomas), with minor amenments to the AIM Rules for Companies rulebook. AIM Rules for Nomas Rulebook The propose new rulebook for Nomas largely restates the existing provisions of the AIM Rules for Companies rulebook which are relevant to Nomas an the Nominate Aviser Eligibility Criteria, although certain aitional rules are inclue: The responsibilities of a Noma the rules set out the ue iligence which a Noma shoul perform before confirming to the LSE that a company is appropriate for AIM. Rule 39 Rule 39, which sets out the various functions which a Noma must perform, is extene, so that a Noma must contact the LSE immeiately if it has concerns about the appropriateness of a company after its amission to AIM, an provies guiance on what the LSE expects from a Noma in relation to its responsibility to act with ue skill an care. The eclaration which a Noma must make on amission of an applicant to AIM has been amene to reflect these changes. Direction of Nomas in exceptional circumstances, the LSE will be able to irect the actions of Nomas to preserve the orerliness or reputation of AIM. Annual returns Nomas will be require to submit an annual return to the LSE, which will be use by the LSE to monitor compliance an assess whether a Noma continues to be eligible. The annual return will nee to inclue information on the relevant transactions carrie out by the Noma in the perio to which the return relates an the qualifie executives employe by the Noma.

2 Aitional Disclosure Private Equity Focus It is propose that companies on AIM will nee to maintain a website setting out key information, incluing a escription of the company s business; its irectors, an a brief biography on each of them; its country of incorporation an main country of operation; the most recent annual report; all announcements mae to the market an all prospectuses, amission ocuments an similar ocuments publishe in the previous 12 months; an etails of the company s key avisers. Moreover, an extra statement will nee to be inclue on the front of each amission ocument, setting out the Noma s uties. Amenments to the AIM Disciplinary Proceures an Appeals Hanbook It is propose that this hanbook will set out an explanation of the LSE s approach an rationale to the isciplinary process, an the factors which it will take into account in eciing whether to take isciplinary action. The concept of a warning notice will be introuce; such a warning will be given where an investigation has been carrie out an the LSE believes that a breach has occurre which oes not justify a fine, censure, or more serious sanction. A warning notice will form part of the compliance recor of the company or Noma which has receive it, an will be taken into account in the event that any further breach occurs. The cap on fines which can be levie by the AIM Executive Panel will be raise from 25,000 per breach to 50,000 per breach. Although the new rules will not come into force until early 2007, the LSE has state that the rules are intene to reflect existing goo market practice an, as such, it expects Nomas to comply with the rules with immeiate effect. The revise AIM rules, along with a marke-up version, are available on the LSE website: christopher.brierley@echert.com Tax Treatment of Equity Ratchets By Elise Bragg In August of this year, HM Revenue & Customs ( HMRC ) issue new guiance on the tax treatment of managers equity investments in venture capital an private equity backe companies following receipt of avice from legal counsel. Backgroun In private equity transactions, it is traitional to incentivise management through ratchet arrangements whereby management s proportionate entitlement to equity in a company is increase if certain agree performance targets are met. Since the publication of Scheule 22 to the Finance Bill 2003 on 16 April 2003, there has been significant ebate as to whether any gains realise on exit shoul be subject to capital gains tax only or whether, where the gain is isproportionately large, the share isposal procees shoul also incur income tax an national insurance contributions. The Joint Memoranum of Unerstaning A joint memoranum of unerstaning ( MOU ) between the BVCA an HMRC publishe on 25 July 2003 set out the conitions for ratchet arrangements which neee to be satisfie in orer to ensure that there woul be no further liability, arising from the ratchet itself uner Chapters 1-5 of Part 7 of the Income Tax (Earnings an Pensions) Act 2003 ( ITEPA ). The conitions provie that: the ratchet arrangements must not vary accoring to the personal iniviual performance of any particular holer of shares; the ratchet arrangements be in existence at the time the venture capital/private equity provier acquire his shares; an the managers pay a price for their shares in the orinary capital that, at the time of acquisition, reflects their maximum economic entitlement. HMRC s FAQ s Subsequently, HMRC issue FAQ4(a) an (c), giving HMRC s view an setting out a formula as to how a Chapter 4 ITEPA benefit charge on a ratchet might be calculate where the ratchet i not meet the conitions an suggesting that a benefit charge might arise where a company was thinly capitalise, where this Autumn 2006 / Issue 16 2

3 gave rise to a isproportionate rewar to a manager (i.e., because the managers o not invest as much ebt on a pro rata basis as the venture capital/private equity provier, the managers are in a position to make an increase rate of return on their investment). Avice on the applicability of a benefit charge was sought from legal counsel who avise that a benefit charge was not sustainable where the benefit to the holer of the shares from the ratchet reflecte rights alreay present in that class of share at the time of acquisition by the manager, or in terms of a thin capitalisation argument. Revise Guiance Following receipt of the avice, HMRC has withrawn the guiance provie in FAQ4(a) an (c). The revise guiance is that where shares are acquire in accorance with the requirements lai own in Sections 1-5 of the MOU then, where there is a ratchet operating at an exit, no benefit charge will arise on the isposal of such shares or, if earlier, on operation of the ratchet. In aition, where the conitions are met (as above), any gains realise on exit will be subject to CGT only an not Income Tax or National Insurance Contributions. HMRC continues to maintain, however, that where the arrangement oes not satisfy the MOU or where the conitions are not met, charges remain possible. In our view, the revise guiance is a positive step in clearing up the consierable uncertainty arising from HMRC s ifferent interpretation of the MOU. elise.bragg@echert.com Without Prejuice Beware By James Stonehill The Court of Appeal has recently consiere how the wors without prejuice affecte two clauses in an acquisition agreement. Facts A purchaser acquire some shares from a seller. The seller gave a number of warranties to the purchaser, incluing in relation to management accounts. Clause 6.3 of the agreement state that any Claim uner the Warranties which shall not have been notifie on or before the thir anniversary of the completion ate shall be eeme to have been waive. Clause 6.4 state that Without prejuice to clause 6.3, [the purchaser] shall notify [the seller] in writing as soon as practicable after the ate upon which [the purchaser] becomes aware of a claim an that such notification shoul contain etails of the claim. Two months before the thir anniversary of completion, the purchaser wrote to the seller notifying the seller of iscrepancies in the management accounts. On the thir anniversary of completion, the purchaser wrote to the seller to give its intention to make a claim an the letter state that the purchaser woul write further in ue course. One year later, the purchaser issue proceeings for breach of warranty. The seller argue that the claim was time barre uner clause 6.3. Decision The Court of Appeal s jugment was in favour of the purchaser. The court hel that clauses 6.3 an 6.4 were quite separate from each other an ha ifferent legal effects. Clause 6.3 operate as a contractual time-bar. Clause 6.4 however impose a contractual obligation to notify the warrantors as soon as was reasonably practicable after the ate on which the claimant became aware of a claim against them. The wors without prejuice to the provisions of clause 6.3 were hel to mean that the provisions of clause 6.4 were not importe into the provisions of clause 6.3. Clause 6.3 was inepenent from clause 6.4. The ecision in Forrests an others v. Glasser an Whitley is not entirely surprising given the particular woring of clauses 6.3 an 6.4. However, the jugment is a reminer that the wors without prejuice shoul be use with care in orer to avoi contractual provisions having an unexpecte outcome. james.stonehill@echert.com Companies Act 2006 By Julie Albery The wholesale reform of company law uner the Companies Bill receive Royal Assent on 8 November, introucing sweeping changes to simplify an improve company law. Company law has been substantially rewritten to make it easier to unerstan an more flexible particularly for small businesses. Autumn 2006 / Issue 16 3

4 Secretary of State Alistair Darling sai: This Act will make sure the regulatory buren on business is light-touch, promote shareholer engagement an will help encourage a long-term investment culture in the UK. Initial Stage The first measures to be introuce will inclue provisions on company communications to shareholers. These will be introuce in January 2007, an, accoring to the DTI, will save businesses over 50million by allowing electronic communications with shareholers rather than paper. The clauses on takeovers which give the Takeover Panel power to make rules within a statutory framework will also be one of the first areas introuce. Measures relating to isclosure to the market an clarification of the liability attaching to such isclosures will also come in at an early stage. Other Areas The new Act: inclues measures giving greater clarity on the uties of irectors, incluing making clear that they have to act in the interests of shareholers, but in oing so have to pay regar to the longer term, the interests of employees, suppliers, consumers, an the environment; encourages narrative reporting by companies to be forwar-looking, covering risks as well as opportunities, with explicit requirements for quote companies; inclues an option for all irectors an shareholers to file a service aress on the public recor rather than a private aress; Note that some clarity has also been provie on what the government expects to be reporte in a company s Business Review in relation to the wiely reporte (an controversial) supply chain arrangements. We unerstan that the new provisions are not intene to impose an obligation to list suppliers an customers or to provie etails about contracts. The provisions are instea about reporting significant relationships, such as major suppliers or key customers critical to the business, an which are likely to influence, irectly or inirectly, business performance an value. It will be for the irectors of the company to exercise their jugment on what they nee to report. By way of example, reliance by a company on a single supplier for a key component such that if the supplier were to go bust, causing a serious impact on the company's business, woul be isclosable. Private Companies The Act also inclues measures to benefit private companies incluing: new moel articles; no nee to have a company secretary unless the company wants to have one; an no nee to have an AGM unless the company wants to hol one. The government has confirme that all parts of the Act will be in force by October 2008, so, whilst there is some time before implementation, companies shoul begin to consier its effects now. Further upates on particular aspects of the Act will be provie over the course of this perio. julie.albery@echert.com promotes shareholer engagement through enhancing the powers of proxies, an making it easier for inirect investors to be informe an exercise governance rights in the company; inclues provisions allowing shareholers to agree limits on the liability of auitors to the company to what is fair an reasonable; inclues a new offence for recklessly or knowingly incluing misleaing, false, or eceptive matters in an auit report; an requires institutional investors to isclose how they use their votes. The Government has, however, mae clear that they hope that the market will provie such isclosure without the nee to exercise the power. Autumn 2006 / Issue 16 4

5 Dechert LLP 160 Queen Victoria Street, Lonon EC4V 4QQ Tel: Web: UK/Europe Brussels Lonon Luxembourg Munich Paris US Austin Boston Charlotte Harrisburg Hartfor New York Newport Beach Palo Alto Philaelphia Princeton San Francisco Washington, D.C. Dechert is a combination of two limite liability partnerships (each name Dechert LLP, one establishe in Pennsylvania, US an one incorporate in Englan) an offices in Luxembourg an Paris which are registere with the Law Society of Englan an Wales as multinational partnerships. Dechert has over 1,000 qualifie lawyers an a total complement of more than 1800 staff in Belgium, France, Germany, Luxembourg, the UK an the US. Dechert LLP is a limite liability partnership, registere in Englan (Registere No. OC ) an is regulate by the Law Society. The registere aress is 160 Queen Victoria Street, Lonon EC4V 4QQ. A list of names of the members of Dechert LLP (who are referre to as partners ) is available for inspection at the above office. The partners are solicitors or registere foreign lawyers. The use of the term partner shoul not be construe as inicating that the member of Dechert LLP are carrying on business in partnership for the purpose of the Partnership Act This ocument is a basic summary of legal issues. It shoul not be relie upon as an authoritative statement of the law. You shoul obtain etaile legal avice before taking action Dechert LLP. Reprouction of items from this ocument is permitte provie you clearly acknowlege Dechert LLP as the source. Autumn 2006 / Issue 16 5