Talking Business podcast: recent developments in corporate law – corporate law post COVID-19

And I have to say at the moment, it does seem to be taking a bit longer than that for things to be processed. There's a HMRC guidance called ‘paying stamp duty on shares’ that you can find on the gov.uk website, which explains what you should include in that covering email when you send your stock transfer form off to HMRC. And in particular, one really key point is to make sure that the reference that you use on your bank transfer when you pay the stamp duty is the same as the one that you quote in your email. Otherwise, HMRC going to have a bit of difficulty matching up the payments it receives with the form you've emailed to them and that could obviously then cause delays on you getting your forms stamped. And also in a change to the temporary process, although you can email your stock transfer form to HMRC, they will return that confirmation to you now by hard copy letter. They used to do it by email, but they've changed that and they're going to send you a hard copy letter.

So obviously, you need to make sure you include in your email the postal address to which you want that confirmation to be sent by HMRC. And that confirmation will include a verification code, which is effectively a digital stamp. So it's going to replace that formal red ink stamp that you used to get on your stock transfer form. So that letter, the hard copy letter that you get back from HMRC, you should keep that with the relevant stock transfer form. But I think in case they ever get separated, it's probably a good idea to write the verification code onto the stock transfer form so that down the line someone can see that it has actually been properly stamped because as I said, there isn't going to be that formal, nice red ink stamp that you used to get on your forms going forward. And then finally, HMRC have helpfully clarified that where a document has been stamped digitally under the temporary process since March 2020, then there's no need to resubmit it for stamping under the permanent procedure now.

There's been a bit of confusion about that before. About whether resubmitting it would be necessary, but it's good that HMRC have confirmed that's not going to be needed. So the second thing that I thought I'd mention also relates to provisions that the government introduced in relation to the pandemic and these related to holding companies holding virtual-only shareholder meetings. So the provision said basically that a company meeting didn't have to be held at any particular place. That it could be held and any votes could be cast by either electronic or another means, and that a meeting could be held without any number of those participating in it actually being physically together in the same place. The provisions also said that company shareholders didn't have any right to attend the meeting in person or to participate in the meeting other than by voting or even to vote by any particular means. So they did have the right to vote by some means, but they couldn't insist on being able to vote in person. And as long as the company basically offered some form of electronic voting, then that was fine.

And all those temporary measures that the government introduced were expressly stated to override any provisions in the company's articles of association. But although they were extended a couple of times, the emergency provisions actually expired at the end of March 2021. So shareholder meetings now are back to being held under the existing provisions that we had. So, many private companies actually choose to pass any required resolutions using the written resolution procedure now without holding an actual general meeting of the shareholders. But some private companies still have shareholder meetings. They quite like to have them sometimes or perhaps they're required to do so under their articles of association. There's also a couple of things which can't be done by written resolution. So that's removing a director from office or removing an auditor before the expiry of their term of office. So private companies can't do those by written resolution and they would have to hold a general meeting to do either of those things. And for public companies, whether they're listed or unlisted, they can't use the written resolution procedure so they have to take any shareholder decisions at a general meeting.

So I think lots of companies we're seeing actually want to be able to retain the flexibility of holding virtual-only meetings or certainly offering some sort of a hybrid meeting. So the question is, can they do this now that we're effectively back under the old regime and we don't have these temporary COVID-related measures in place? So some companies have previously held virtual-only meetings. I think most famously the 2016 AGM of Jimmy Choo, the shoe designer was held virtually just as a virtual-only meeting. But there is some concern that that's actually not currently permitted under UK law. The key stumbling block is the interpretation of the requirement in the Companies Act for the notice of a general meeting to state the place of the meeting. So if that reference to place can be interpreted as including an electronic platform, then obviously a meeting could be held on a purely virtual basis.

But if the courts were to interpret the requirement to state the place of a meeting as a requirement to stay a physical place, then a purely virtual meeting would actually not be valid. So because of that, there's uncertainty over whether a company can validly hold a general meeting on an entirely virtual basis under the current provisions. And clearly, if important decisions are going to be taken at a meeting and that meeting is then subsequently found to be invalid, well that's going to have significant repercussions for the company. So the FRC and various other bodies such as the GC100 are urging the government to provide some clarity on this. But for now, we're just stuck where we are with this uncertainty. And one of the issues is that that uncertainty and the interpretation of that requirement to state the place of a meeting, that's never been tested properly in the courts. But there was a recent decision by the High Court in relation to meetings of local authorities.

So not companies but local authorities. And that suggests that maybe the narrower interpretation, which prohibits the holding of those virtual-only meetings, that might actually be the correct approach. So, as I said, that case was concerned with a meeting of a local authority, not a company, but it asks the High Court to confirm that after the equivalent temporary measures permitting virtual-only meetings for local authorities expired, it would still be able to hold meetings in this way. So it basically asked the court to confirm that the requirement to state the place of the meeting should include an online forum. But unfortunately, the High Court refused to interpret it in that way. And one of the key factors that the court said influenced its decision was that by passing the temporary COVID-related legislation, Parliament had actively intervened to allow those virtual-only meetings during the pandemic.

So the government had introduced equivalent provisions for local authorities to allow them to hold virtual-only meetings during the pandemic as it did for companies. And so the court said, "Well because parliament decided to intervene and allow those virtual-only meetings, that suggested that those kinds of meetings actually, they weren't possible before then and so they wouldn't be permitted when that exceptional intervention had expired." And the court also said that a requirement for a notice to state the time and place of a meeting was inconsistent with the idea that a meeting can take place in multiple locations, such as people's homes. So, unfortunately, it seems that now that those temporary provisions have lapsed, meetings must be held under the existing provisions. And because of that recent case, which is, as I said, only related to local authorities, but local authorities were subject to similar temporary measures that'd been introduced for companies. And the underlying legislation for local authorities similarly had that requirement in that to state the place of the meeting.

So because of that, I think companies that want to offer their shareholders the maximum flexibility going forward... And there has been some evidence that actually allowing those virtual-only meetings has encouraged shareholder attendance at meetings. But because of that, if you want to offer that flexibility to shareholders, then you should really hold a hybrid meeting. So what that means is that the company has a physical meeting with a quorum present to which other shareholders are then encouraged to attend by an electronic means. So you have that physical meeting, but also you have people joining electronically. Obviously, you would still have to comply with any relevant social distancing requirements and restrictions on the number of people who can meet indoors for as long as those are in place. And obviously, they're changing quite regularly at the moment. But certainly, once larger indoor gatherings are allowed, then shareholders shouldn't be prevented from attending the physical meeting in person if that's what they want to do.

And finally, the general view is that whilst it would be nice to see an express provision in a company's articles of association, permitting it to hold these kind of hybrid meetings, actually, they can do that as long as there's nothing in the articles which would expressly prevent it. So another measure that was introduced last year in response to the pandemic was the new restructuring plan. But although that introduction was driven by the pandemic, actually it was always intended to be a permanent measure. So this isn't something that's going to be disappearing. Restructuring plans are going to be around for the foreseeable future going forward. And we're gradually beginning to see these plans being sanctioned by the court. And so we're beginning to see how they're being used in practice and what approach the court is taking to them. So a restructuring plan basically involves a compromise or arrangement between a company and its creditors or members, or just a class or more than one class of those creditors or members.

A plan can only be proposed by a company that has encountered or is likely to encounter financial difficulties affecting its ability to carry on business as a going concern. And the purpose of the compromise proposed by the plan must be to eliminate, reduce, or prevent or mitigate the effect of those financial difficulties. Now crucially, a plan once it's sanctioned by the court ,can be imposed on a dissenting class of creditors, and that's known as the cross class cram down. But you can only impose a plan on those dissenting creditors provided that they would be no worse off in the relevant alternative. So that's whatever the court thinks would be most likely to happen if the plan wasn't sanctioned. And then also crucially, the plan must have been approved by at least one class of creditors who would receive a payment or have a genuine economic interest in the company in that relevant alternative. So back in September last year, Virgin Atlantic made history when it became the first company to enter into a compromise with its creditors using the new restructuring plan.

And now, another Virgin company has made legal history in a case where a restructuring plan was used to compromise the rights of dissenting creditors, where the company was able to show that those creditors were out of the money. So the restructuring plans here were proposed by a Virgin Active group, and they propose to make compromises with the secured lenders, landlords and general property creditors of that group. In particular, the landlords who were divided into five subclasses were going to be offered different commercial terms in respect of the arrears of rent that had arisen during the pandemic and future rent payments depending on the company's assessment of the profitability of the various different sites. So some of the landlords of the least profitable sites were only going to be offered lower rents and a very small payment relating to arrears and the ability to exercise a new break clause.

So at the various class meetings, the restructuring plans were approved by the secured creditors and one class of the landlords. But then they were rejected by all the other classes of the landlords and also by the general property creditors. So the court then had to decide whether or not to sanction the restructuring plans, exercising the cross-class cram down and imposing those plans on those dissenting creditors. So those creditors who are owed money by Virgin Active but have said, "No, we don't agree with these plans. We don't want our rights to be compromised in this way." So when it approached this and thought about it, the court said that when considering this ability to impose plans on dissenting creditors, the court first had to identify what the relevant alternative was. So that's what's going to be the most likely outcome for the company if the plans are not sanctioned.

And then having done that, it had to determine what that outcome would mean for the dissenting classes and compare that to the outcome for those classes under the proposed restructuring plans in order to tell whether or not the descending classes would be any worse off. So in this case, the court found that actually, the relevant alternative would be a trading administration. And it also found that the value of the companies broke with the secured creditors. So what that means is that because of their security, the secured creditors would be entitled to the value of the company in a trading administration. And the unsecured creditors would not be entitled to anything other than the prescribed part. So the unsecured creditors would be out of the money in the relevant alternative. So when the court then compared that to their position under the restructuring plans, the court said, "Well, actually the dissenting classes are going to be no worse off under those plans because they're not going to get anything basically in the relevant alternative in an administration. And therefore, they're not going to be any worse off than what the company is offering them under these restructuring plans." 

So, having decided that the dissenting creditors were going to be no worse off, the court then had to decide whether to exercise its discretion to sanction the plans and impose the cross-class cram down on those dissenting creditors. And the judge said, "Well, there's no automatic presumption that a plan would be approved where the relevant conditions for the cross-class cram down existed." But as the value broke in the secure debt, the court said, "Well, it's basically for those creditors to decide how to divide up any value created by the restructuring, and the dissenting vote of creditors who are out of the money should not really weigh very heavily in the court's decision to exercise discretion and sanction the plans."

So on the facts of this case, the court did sanction the plans and some of the key facts really, I think, were the fact that the dissenting landlords hadn't produced their own evidence as to the estimated rental values of their sites, and they hadn't given any evidence as to why they'd voted against the plans. They just voted against it. So, as I said, this was the first time really that this new restructuring plan regime has been used to compromise the rights of landlords. And it's been common for company voluntary arrangement (CVAs) to be used to compromise the liabilities of companies with significant property portfolios. But the restructuring plan offers the advantage of this cross-class cram down, as it's called, to deal with those dissenting classes who actually if the company was doing a CVA, might be able to block that CVA by refusing to approve it.

So I think the decision highlights that it's in the money creditors who control the division of the company's value, including as against those creditors who are out of the money. So unlike in the present case, landlords will need to submit robust valuation evidence to show not only that they're in the money, but also that they would be worse off under the restructuring plan than in the relevant alternative. But obviously, that's going to be a bit of a challenge for landlords because they're going to be trying to do that needing information from the company to prepare that valuation and the alternative assessment at a time when perhaps they're receiving little or no rent, and it's going to be quite costly for them to have to obtain that expert valuation.

So finally, I thought I'd mention, not some more post-COVID changes, but this time some post-Brexit changes. So the Financial Services Act recently received Royal Assent, and it's the first piece of primary legislation relating to financial services to be passed since the UK left the EU. Amongst other things, it makes certain changes to the UK's retained version of the EU's market abuse regime. So we've got the EU market abuse regime, EU MAR, and when the UK left the EU that was effectively transposed into UK domestic legislation. So we have UK MAR. And at that point, UK MAR and EU MAR were exactly the same, but the Financial Services Act makes some changes to that to show the beginnings of the diversions between the EU version and the UK version post-Brexit. So these changes are going to be particularly relevant, obviously, for public companies whose shares are listed or traded on a stock exchange.

So the relevant changes cover kind of three areas really. So the first one relates to notifying the market, sorry, notifying the market of transactions by PDMRs that's persons discharging managerial responsibilities in the company and persons closely associated with them. So EU MAR requires those people to notify both the company and the FCA of their transactions in the company securities within three business days of the transaction. But the company itself is also required to notify any such transaction to the market within that same timescale. So within three business days of the transaction taking place, but obviously that can be a difficult obligation for the company to satisfy if, for example, they'd only received a notice from the PDMR late on the third business day say. And then the company is right up against it in terms of it meeting its own deadline to notify the market. So the new Act is going to amend UK MAR so that the notification by the company must instead be made within two working days of receiving notification from the PDMR.

So the PDMR notifies the company within three business days and the company then has a further two working days to notify the market. And working days under this new change excludes bank holidays in England and Wales. So that change is going to come into force towards the end of June, on the 29th of June. 

The next change relates to maintaining insider lists. So EU MAR, the European version of the legislation says that insider lists, so that's basically a list of all the people with inside information relating to a company, they have to be maintained by all listed companies. And then goes on to say, or any person acting on their behalf or on their account. So that led to some confusion about exactly who had to maintain a list. Could it be done either by the company or someone acting for them or did they each have to maintain their own list?

So it wasn't clear. There was a bit of confusion there. So the new Act is going to amend the UK retained version of MAR, Market Abuse Regime to clarify that both listed companies and those acting on their behalf or account must maintain insider lists. And again, that change is going to come into force on the 29th of June. 

And then the final changes relate to increased criminal penalties for market abuse. So the current penalty for insider dealing, the current term of imprisonment is a maximum of seven years. But that's less than the maximum sentence for fraud, which is 10 years, which really is considered to be a comparable economic crime. And that led to concerns that insider dealing could be perceived as a lesser offence as a result and that that in itself would increase the likelihood of market abuse, of somebody committing those crimes.

So the new Act is going to increase the maximum sentence for insider dealing to 10 years to put it on an equivalent footing with fraud. And then for similar reasons, the maximum sentence for market manipulation will also be increased from seven to 10 years. But a date for when those particular changes are going to come into force hasn't actually yet been set. So those are the first post-Brexit changes to the UK's financial services regime. And of themselves, they're not particularly significant, but they perhaps begin to mark the diversions between the UK and the EU, particularly when it comes to market abuse with the UK in this instance acting to fix perceived defects in that EU regime. 

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