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Corporate & Commercial Briefing Notes
Agreements to Agree revisited: MRI Trading v The Erdenet Mining Corp
Prior to this month’s decision of the Court of Appeal in MRI Trading AG –v- The Erdenet Mining Corporation LLC (2013) it had been generally safe to assume that ‘agreements to agree’ written into contracts in relation to fundamental provisions of the contract (such as pricing) would most likely be unenforceable for lack of certainty. In this case an ‘agreement to agree’ in respect of a treatment charge, shipping charge and shipping schedule in a contract for the sale of copper concentrates was upheld and a term was implied that the charges and shipping schedule were to be reasonable or referred to arbitration in the event of dispute.
Erdenet and MRI had contracted for Erdenet to supply copper concentrates to MRI. A dispute arose and, as part of a settlement agreement, three future contracts for the supply of the concentrate were entered into. Erdenet complied with the first two contracts but refused to deliver under the third contract which contained the ‘agreement to agree’. An arbitral tribunal found that the contract was unenforceable as it contained an ‘agreement to agree’ on an important aspect of price. The High Court allowed MRI’s appeal, and Erdenet appealed to the Court of Appeal. The Court of Appeal upheld the High Court decision and found in favour of MRI. The Court’s reasoning was that it would be perverse to attribute to parties an intention not to be bound in circumstances where every other aspect of the contract, including quality, specification and price, had been agreed. The Court also placed emphasis on the parties agreement to arbitrate disputes. The Court read the disputed contract with the other two contracts and the settlement agreement, seeing them as parts of a whole, and therefore finding that there had already been part performance. The case demonstrates the Court’s willingness to imply terms where there is uncertainty over a reasonably fundamental provision of the contract. If you would like further information, please contact Toby Stroh, head of Druces LLP’s Corporate & Commercial team or Tim O’Callaghan, Partner.This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force in May 2013.
Bouabdillah -v- Deutsche Bank: employee dismissed for proceedings against former employer
In the recent case of Bouabdillah v Commerzbank AG ET/2203106/12 an employment tribunal upheld Ms Bouabdillah’s claim that she was victimised and that her dismissal was linked to the discrimination proceedings she had brought against her former employer, Deutsche Bank. Commerzbank tried to argue that Ms Bouabdillah’s failing to disclose the proceedings during the recruitment process had caused a breakdown in trust and confidence and in turn led to her dismissal. The tribunal found that even though Ms Bouabdillah may have not given full answers to questions, her responses were not misleading or dishonest. Furthermore, it was held that the litigation was a private matter and did not affect Commerzbank’s reputation. The tribunal concluded that Commerzbank had had a knee-jerk reaction following the discovery of the information and that they did not analyse sufficiently whether they were right to conclude that there was a breakdown of trust and confidence. It was held that the dismissal was an “emotionally driven” decision which victimised the claimant.
This case suggests that prospective employees have no obligation to volunteer to a prospective employer that they have brought proceedings against a former employer during the recruitment process because such proceedings are considered to be a private matter. However, employees must not be dishonest or misleading in their responses and therefore must give accurate responses to direct questions. If you would like further information about this or similar issues, please contact Toby Stroh, Head of Druces LLP’s Corporate & Commercial Team.This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force at May 2013.
Registration of security interests by companies and LLPs
Relevant to: Lenders and all UK registered companies
Summary: A new registration regime for security interests created by companies and limited liability partnerships registered in England and Wales, Scotland and Northern Ireland came into force on 6th April 2013. This regime is implemented by the Companies Act 2006 (Amendment of Part 25) Regulations 2013 (SI 2013/600) and the Limited Liability Partnerships (Application of Companies Act 2006) (Amendment) Regulations 2013 (SI 2013/618). The new security registration regime for LLPs is largely the same as that for companies.
The key changes imposed by the new regime are as follows:
• The new regime is permissive not compulsory so that charges “may” rather than “shall” be registered.
• The new regime applies to all charges and mortgages other than limited exceptions which are listed in section 859A (6).
• Criminal sanctions against the company and its officers for non-registration of a registrable charge have been removed.
• Companies House has issued new forms for registering security.
• Electronic registration is available. In order to file electronically a one-off application will need to be completed to obtain a “lender authentication code”. Lenders can use the existing on-line code for registration of future charges.
• A certified copy of the signed security document rather than the original must be submitted with the particulars of charge. This will then be available on the public register, although certain limited information may be redacted (section 859G).
• A certificate of registration will be issued once the charge has been successfully registered and a unique twelve digit reference code will be allocated to the charge.
Effect of registration (unchanged from previous regime)
A correctly registered charge is valid as against the liquidator and any creditor of the company that created the charge. Registration may also give notice of the existence of the charge to third parties and establish the priority of the charge.
Effect of non-registration (unchanged from previous regime)
If a charge is not registered at all, or is registered outside the allowed 21 day time period under section 859H the security becomes void as against the liquidator, administrator or creditors but remains valid as between the company and the charge holder. When a charge becomes void the money secured by it becomes immediately payable.
The new regime applies to all charges created on or after 6 April 2013. Any charges created before 6 April 2013 must be registered in accordance with the previous regime even if they are registered at Companies House after 6 April 2013.
The new system of satisfaction of or release of a charge set out in new section 859L of the Companies Act 2006 must be followed regarding any satisfaction or release registered on or after 6 April 2013, irrespective of when the charge was created.
The FSA’s Model Code – written and ignored? Nestor Healthcare Group
On the 14th February 2013 the FSA fined Nestor Healthcare Group Limited (“Nestor”) £175,000 for failing to take adequate steps to ensure that its senior executives and board members complied with the share dealing provisions of the FSA’s Model Code. This was not a case that resulted in questions over market conduct/manipulation or insider dealing under s118 of the FSMA. Nor was it a case where Nestor failed to have an adequate policy in place. This was a case where breaches occurred principally due to Nestor’s weak procedures which ostensibly allowed for policy to be “forgotten” by the board. The FSA’s fine represents the first penalty imposed on a company for breaches of the Listing Rules and Listing Principles relating to compliance with the Model Code, undoubtedly it will not be the last.
The FSA’s findings
The FSA found that between October 2006 and June 2010 Nestor failed to take reasonable steps to secure the compliance of persons discharging managerial responsibility (“PDMR”) with paragraphs 3 -7 of the Model Code and in so doing breached Listing Rule 9.2.8 and that it failed to take reasonable steps to enable their directors to understand their responsibilities and obligations under paragraphs 3-7 or to maintain adequate procedures, systems and controls to enable compliance with the obligations set out under Listing Rule 9.2.8. Nestor had previously implemented a “Share Dealing Policy”, adherence to which, at least initially, would have ensured compliance by the PDMR with the Model Code. However, Nestor failed to take reasonable steps to ensure adherence to this policy and also failed to review and update the policy where necessary. Instead the FSA found that an informal and ad-hoc process was observed giving rise to four clear failings (i) PDMR failed fully to understand their responsibilities under paragraphs 3-7 of the Model Code; (ii) two separate purchases of shares by a PDMR were transacted without the required approval of the whole board, as provided by the Model Code; (iii) one purchase of shares by a PDMR was carried out over two months after proper clearance was received, whereas the Model Code states transactions should take place within 2 business days; and (iv) on four separate occasions Nestor failed to maintain records of responses to deal requests and to provide a copy of the clearance to the restricted person concerned.
The FSA fond that the Share Dealing Policy had been circulated to all directors, PDMRs and insider employees, and each had signed an acknowledgment confirming that they understood the requirements and that they would ensure compliance with them. Six monthly reminders were issued to all of the parties (as detailed above), reminding them about when trading would be permitted. However, the FSA found that Nestor did not review the adequacy of its PDMR share dealing arrangements and so poor practice was overlooked and the company failed to identify ongoing breaches. After distributing the Share Dealing Policy, Nestor also failed to issue reminders or provide training about its content or the requirement to comply with it, or to reinforce its Share Dealing Policy. It was not enough to rely on the experience and knowledge of directors alone to meet the requirements of the Model Code. In addition, the FSA found that Nestor failed to identify another company officer (other than the CEO and Chairman) or committee of the Board who would be designated to give clearance to deal, as stipulated by paragraph 4 of the Model Code. Nestor agreed to settle at ‘stage one’ and as such were given the usual 30% discount on their fine. Were it not for the discount they would have faced a penalty in the region of £250,000.
Regulation and Legislation
The Model Code Imposes restrictions on dealing in the securities of a listed company beyond those provided in law. The intention of the Model Code is to ensure those “discharging managerial responsibilities” neither abuse nor place themselves under suspicion of abusing inside information that may be considered to be in their possession, concerns that will be especially heightened in periods running up to announcements concerning the company’s results. Further it states that such persons given clearance to deal must deal as soon as possible and in any event within two business days of clearance being received
Rule 9.2.8 requires a listed company to require every person “discharging managing responsibilities”, to comply with the Model Code and take all proper and reasonable steps to secure their compliance. It is important to note that this includes directors of the company and every senior executive of a company who has regular access to inside information, relating directly or indirectly to the issuer and has power to make managerial decisions affecting the future development and business prospects of the company. Listing Principles asserts that a listed company must take reasonable steps to (i) enable its directors to understand their obligations and responsibilities as directors; and (ii) establish and maintain adequate procedures, systems and controls to enable compliance with its obligations.
Again, the FSA can be seen exercising their regulatory powers in relation to failures of internal policy and procedures even where there has been no intentional breach of the rules, where no dealings have taken place on the basis of information, and where there has been no actual financial benefit from the misconduct. This penalty represents another example of the FSA fulfilling its “credible deterrence strategy” and sends out a strong deterrence message of the need to adhere to the Model Code. In addition, both the Model Code and Chapter 9 of the Listing Rules are seen as “fundamental to the protection of shareholders”, which continues to be at the top of the corporate agenda.
How Druces can help
We can help in (i) setting up your company structure; (ii) identifying those persons discharging managerial responsibility; (iii) identifying what constitutes “inside information” and “insiders”; (iv) identifying organisational, regulatory and legal risk; (v) assisting with policy architecture – drafting policies that are right for your company, one size does not fit all; (vi) undertaking policy reviews – as your company evolves your policies need to reflect changing risk; (vii) training and Education – providing effective in-house training to PDMR’s and reviewing training needs with necessary updates; (viii) providing advice on good Corporate Governance to promote adherence at all levels; (ix) providing assistance and support to your Company Secretary and/or in house legal team.
This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force on 28th February 2013.
Alternative Investment Fund Managers Directive – will you be ready?
The Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”) must be implemented by member states of the EU by 22 July 2013. In the lead up to implementation, we will consider its likely impact, review the main issues and look at how they will affect you and your business.
Background and Definitions
The aim of AIFMD is to introduce a harmonised regulatory framework throughout the European Union for European Union established alternative investment funds managers (“AIFM”). An AIFM is defined to include both natural and legal entities whose “regular business” is to manage one or more alternative investment fund(s) (“AIF(s)”). An AIF continues to be considered as a “collective investment undertaking”; at this moment there is no formal definition of an AIF within the content of the directive. As such, it would seem that all non-undertakings for collective investment in transferrable securities (“non-UCITS”) funds, some managed funds and third party joint venture arrangements will fall into the wide description.
Impact and Territorial Scope
Initial estimates by the European Commission suggested that almost 90% of the assets of European Union domiciled hedge funds, managed by 30% of hedge fund managers would fall under the auspices of the AIFMD. In addition, it is conservatively estimated that the AIFMD would be applicable to around 50% of those who manage other AIFs, this figure is said to include private equity funds managers. It is important to note that the directive will apply irrespective of where the AIF is established. The dynamic of the extra-territorial scope means that the directive would be applicable to non-European Union alternative investment fund managers marketing alternative investment funds within the European Union.
Funds/ products and services
The AIFMD will not cover those funds already covered by the UCITS IV Directive (2009/65/EC). Broadly speaking it will apply to managers of hedge funds; private equity funds; property funds; commodity funds; venture capital funds; and investment trusts. This is not an exhaustive list and those who are unsure as to whether they will be affected by the AIFMD should contact us for advice. Ostensibly, once the AIFMD is in force, your AIF will come under regulations, rules and principles as set out by the Financial Conduct Authority (“FCA”). Note that your business will not only need to be authorised by the FCA but it will also supervised by the FCA.
The key areas of your business that will be affected are: Authorisation; capital requirements; passporting; management and marketing of non-EU AIF’s; supervision; intervention and powers of the regulator; governance; systems and controls; risk management; conflicts of interest; remuneration and conduct of business; independent valuation of assets; delegation of functions; third party risk management; transparency to key stakeholders and potential investors prior to investment; disclosure; reporting obligations
The text of the AIFMD was published in the Official Journal of the EU on the 1st July 2011 and the directive came into force on the 21st July 2011. It must be implemented by member states, by the 22nd July 2013, and HM Treasury published a consultation paper on the proposals in January 2013. Work at EU level is not yet complete. At the time of this note there were 90 or more secondary measures being considered which will have to be settled before the implementation date. Both the FSA and HM Treasury are expected to publish further consultation papers on AIFMD by the end of the first quarter of 2013. In addition, the European Securities and Markets Authority (“ESMA”) is developing extensive guidance covering calculations of leverage; mixing of funds; and information exchanges between European regulators.
The FCA which will replace the FSA on the 1st April 2013, aims to be in a position to receive AIFM applications covering authorisations and the varying of permissions by the 23rd July 2013. Firms managing AIFs before the 22nd July 2013 need to ensure that they have submitted their application for authorisation by the 22nd July 2014. Passports for non-EU AIFs and AIFMs will be considered and it is currently timetabled for the European Commission to adopt implementing legislation in 2015. It is thought that final implementation of any further areas of the directive will be complete in 2018.
How Druces LLP can help
1. We can keep you up to date with changes and guidance to the Directive; 2. We can help you determine whether your business falls under the umbrella of the Directive; 3. We can advise you on what this means for your business; 4. We can advise you on the transition from a non-regulated business to a regulated business environment; 5. We can advise you on your application for authorisation to the FCA and the threshold conditions; 6. We can advise you on how the FCA work and what standards you will be expected to reach and attain; 7. We can advise you on the powers the FCA will have in respect of your business and what they can do if there are perceived failures.
This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force in January 2013.
Penalty Clauses: Cavendish Square -v- El Makdessi
In the recently decided High Court case of Cavendish Square Holdings BV and another v El Makdessi (2012) the evolution of the courts approach to penalty clauses seems to have reached a new plateau. Penalty clauses generally provide for a party in breach of a contractual term to pay a punitive sum (or suffer some other detriment, such as forfeiting property). True penalty clauses are generally unenforceable and so determination as to whether a clause would be construed as a penalty clause or not is important. Historically, the court has decided this question by assessing whether the amount of the penalty is a genuine pre-estimate of the other party’s loss. If so, the clause will not be a penalty and it will be enforceable.
In Cavendish Square the High Court departed from this approach and applied a different test to determine whether the clause was an unenforceable penalty or not. The contract under consideration in the case was a share purchase agreement, with restrictive covenants binding the seller who was to remain a non-executive director of the company post completion. The contract stated that if the restrictive covenants were breached the seller would lose the right to future instalments of the consideration and the price payable on remaining shares would be calculated on net asset value, rather than on multiple of profits – resulting in a much lower payment.
The seller argued that the price adjustment in the event of breach was an unenforceable penalty. The High Court held that the provisions were not penalties. Rather than applying the ‘genuine pre-estimate of loss’ test, the test that the court applied was whether there had been a ‘commercial justification’ for the clause. It was found that there had been such justification. The commercial justification was that adjustments in consideration between the parties was based on substantial loss of goodwill, in addition, the court noted that the predominant purpose of the clause was not to deter breach and that the provisions were neither ‘extravagant or oppressive’. The clause had also been negotiated on a level playing field.
This is an important judgment for all those dealing with private equity transactions and other areas of law where such clauses are often encountered.
This note does not constitute legal advice but is intended as general guidance only. If you would like further information, please contact Toby Stroh, head of Druces LLP’s Corporate and Commercial team or Tim O’Callaghan, Partner.
Charitable incorporated organisations (CIO): implementing legislation now in force
The Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 (SI 2012/3013); Charitable Incorporated Organisations (Consequential Amendments) Order 2012 (SI 2012/3014) and Charitable Incorporated Organisations (General) Regulations 2012 (SI 2012/3012) came into force on 2 January 2013.
The Charitable Incorporated Organisation (CIO) is a new incorporated legal structure with separate legal personality and limited liability intended specifically and exclusively for use by charities. CIOs will be registered with, and regulated by, the Charity Commission. The law applicable to CIOs is contained in sections 204 to 250 of the Charities Act 2011 (ChA 2011), but these provisions will not come into force until a commencement order is made. ChA 2011 also gives the Minister for Civil Society power to make regulations with more detailed provisions about the formation, operation and dissolution of CIOs.
The Charity Commission has been accepting applications to register new CIOs in the register of charities since 3 January this year. However, it is likely that there will be delay until later this year or 2014 before the coming into force of provisions which will enable existing charitable CLGs, community interest companies and charitable industrial and provident societies to convert into CIOs.
The Government has assumed that the target market for CIOs is charities with annual incomes of between £10,000 and £500,000. There are believed to be around 70,000 registered charities within this income bracket in the UK. It also assumed (based on experience of take-up of the Scottish CIO) that 20% of existing charities will adopt the CIO structure. Government estimates suggest that the average cost of incorporating a CIO will be broadly equivalent to the cost of incorporating a CLG. However, one advantage of the CIO is that it is estimated that the average costs of the annual accounts and reports preparation for a CIO will be significantly lower than for CLGs.
TUPE – consultation on the proposed changes to the Regulations
On 17 January 2013, the Government issued a consultation on a number of proposed changes to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’). TUPE’s purpose is to protect employee’s employment rights when the business or undertaking for which they work transfers to a new employer or where the work they are doing on behalf of a particular client transfers to a new contractor. The Government has said the proposed changes will “improve and simplify” TUPE for all parties involved. The consultation follows the call for evidence in November 2011 on the effectiveness of TUPE.
Service provision changes
The most significant of the proposed changes is the repeal of the regulations relating to service provision changes. TUPE was amended in 2006 to bring most service provision changes (i.e. outsourcing, insourcing and retendering) within the scope of TUPE. The Government proposes reversing this change. However, it recognises that service providers may have entered into existing contracts on the assumption that TUPE will apply at the end of the contract. The Government also notes that the outsourcing process can be a long period and, for larger and more complex services, could take a year or longer. In light of these factors, the Government has asked for views on the length of any “lead in” period that would be required before the change comes into effect.
Employee liability information
Regulation 11(2) of TUPE sets out information that must be provided by the transferor to the transferee prior to the transfer. The Government is proposing the removal of the transferor’s obligation to provide employee liability information. However, it will make it clear that a transferor should disclose information to the transferee where it is necessary for either party to meet their obligations to inform and consult on a TUPE transfer.
Contractual changes, protection against dismissal and substantial changes to working conditions
The consultation document includes proposals to amend the provisions of TUPE that restrict post-transfer changes to employment contracts, the provisions that give protection against dismissal and the provisions concerning a substantial change in the working conditions to the material detriment of the employee so that they more closely reflect the wording of the underlying Acquired Rights Directive (2001/23/EC) and case law of the European Court of Justice.
Dismissals arising from a change in the workplace
The Government proposes to amend TUPE so that an “economic, technical or organisational reason entailing changes in the workforce” (an ETO reason) includes changes to the workforce’s location.
Currently, there is no statutory definition of “entailing changes in the workforce”, but the UK courts have restricted it to mean changes in the numbers employed or the functions performed by employees. Under the proposed changes, the definition of an ETO reason would be aligned with the definition of redundancy under the Employment Rights Act 1996, so that dismissals arising from a change in the place of work following a transfer will not be automatically unfair.
Collective redundancy consultation
It is common for redundancies to take place after a TUPE transfer. If so, there may be overlapping obligations to inform and consult under TUPE and in respect of collective redundancies. The Government believes that the consultation process should be able to start before the transfer and proposes to amend TUPE to provide that the transferee can consult with the transferring employees prior to the transfer about proposed collective redundancies.
The Government proposes allowing “micro businesses” (those with fewer than ten employees) to inform and consult with their employees directly with regard to TUPE, rather than through representatives, in cases where there is neither a recognised union nor existing representatives.
Terms and conditions derived from collective agreements
The Government is seeking views on whether it should amend TUPE to limit the period for which terms derived from collective agreements apply to one year from the transfer.
The Government has also asked for views on whether or not a transferor should be able to rely on the transferee’s ETO reason in respect of pre-transfer dismissals.
What happens next?
Responses to the consultation are required by 11 April 2013. The Government has said that it will respond within 12 weeks of the consultation closing. If the consultation supports the proposed changes, the Government intends to introduce them (save probably those relating to service provision changes) in October 2013. The consultation paper can be found following the link below: