Article / 1 Jan 2025
In this month’s update we:
After the uncertainty caused by two earlier decisions, the High Court has clarified the powers of a sole director to act on behalf of a company that has adopted the Model Articles.
The uncertainty arose out of the interaction between two key provisions of the Model Articles for Private Companies Limited by Shares, namely:
When the Model Articles were first introduced in October 2009, there was some discussion about the interaction of these provisions and whether the quorum requirement in Model Article 11(2) could be interpreted as a provision requiring the company to have more than one director for the purposes of Model Article 7(2). If it was interpreted in this way, it would cast doubt on the validity of decisions taken by a sole director, despite the fact that the Companies Act 2006 was clear in permitting a private company to have a sole director (section 154(1) CA2006).
But the consensus view, which was then reflected in market practice for over a decade, was that Model Article 11(2) did not require a minimum number of directors and was part of the general provisions about directors’ decision-making which did not apply when the company had a sole director.
This standard interpretation was called into question in Re Fore Fitness Investments Holdings Ltd [2022] EWHC 191 when the High Court held that a requirement in a company’s articles of association for a quorum of two directors prevented a sole director from acting. In that case, the company’s articles contained a bespoke quorum provision, but it was clear that the judge’s comments on this were also directed at the quorum requirement in Model Article 11(2).
Later the same year, some clarification was offered in Re Active Wear Limited [2022] EWHC 2340 (Ch) when the judge confirmed that, in his view, Model Article 7(2) (permitting a sole director to act) prevailed over Model Article 11(2) (fixing a quorum of two). He said that the Model Articles had to be read as a whole and to interpret the quorum requirement as requiring a minimum of two directors would deprive Model Article 7(2) of any practical meaning. But the judge reached this decision in part on the basis that the company in this case had only ever had one director. He said that where the number of directors had fallen to one from a higher number, there was as “apparent tension” between Model Article 7(2) and another provision, Model Article 11(3), which limits directors’ decisions where their number has fallen below the required quorum to just appointing further directors or calling a general meeting.
The point was recently considered again in Re KRF Services (UK) Ltd [2024] EWHC 2978 (Ch). Here, the relevant company had adopted an unamended version of the Model Articles but, whilst it currently had a sole director, that had not always been the case and it had previously had multiple directors. The judge followed the reasoning in Re Active Wear, holding that where a company has a sole director and its articles did not require it to have more than one director (as was the case with the Model Articles), then Model Article 7(2) prevails over the quorum requirement in Model Article 11(2).
The judge also said the fact that the company had previously had more than one director was “irrelevant”. In order for Model Article 7(2) to apply, two conditions had to be satisfied:
The decision in Re Fore Fitness was controversial and did not reflect the practical interpretation and application of the Model Articles since they were introduced in October 2009. Whilst the subsequent decision in Re Active Wear was helpful, it still left some uncertainty for sole director companies that had previously had multiple directors. The latest decision in Re KRF Services has helpfully clarified the position further.
For companies with an unamended version of the Model Articles, there is no longer any confusion: a sole director of such a company has full decision-making powers that are unaffected by the quorum requirement in Model Article 11(2), regardless of the number of directors that have held office from time to time.
For companies that have amended the Model Articles, or have adopted bespoke articles, they will need to be carefully reviewed to confirm that they do not contain a provision which could be interpreted as requiring the company to have more than one director (for example, specifying an express quorum of two, specifying a quorum with different categories of director, specifying a requirement for a minimum of two or more directors, etc.). Such a provision would cast doubt on the ability of a sole director to take any action other than appointing another director or convening a general meeting.
The Financial Conduct Authority (FCA) has fined a former senior executive of Wizz Air Holdings plc £123,500 for trading in the listed company’s shares when he was not allowed to, and for failing to notify his trades.
This is the first time that the FCA has fined a person discharging managerial responsibilities (PDMR) for trading company shares during closed periods under Article 19(11) of the Market Abuse Regulation (MAR), and only the second time the FCA has fined a PDMR for failing to disclose personal trades under Article 19(1) MAR.
PDMRs are directors or senior executives who have: (i) regular access to inside information relating to the company; and (ii) the power to make managerial decisions affecting the future development and business prospects of the company. The individuals who are designated as PDMRs will vary from company to company and not all senior managers will necessarily be PDMRs.
Under Article 19(1) MAR, PDMRs (and persons closely associated with them) must notify the company of all transactions conducted on their own account relating to the shares or debt instruments of that company. Notifications to the company must be made no later than three business days after the transaction, and within two working days of receiving a notification, the company must make the notified information public.
Article 19(11) MAR provides that PDMRs should not deal in shares or debt instruments of their company during a closed period. This is defined as a period of 30 calendar days before the announcement of an interim financial report or a year-end report that the company is required to make public.
The restrictions on PDMRs trading during closed periods, and the requirement for transparency on their trades, are key safeguards against market abuse.
Mr Sebok was appointed as Chief Supply Chain Officer of Wizz Air in 2019. By consenting to the terms of his employment contract, Mr Sebok agreed to adhere to his obligations as a PDMR. These obligations included the requirement to notify Wizz Air of any dealing in Wizz Air shares and to comply with applicable restrictions on share dealing as set out within MAR and Wizz Air’s Share Dealing Code.
As a member of Wizz Air’s Leadership Team, Mr Sebok regularly attended board meetings (although not a director) and had access to draft financial results before they were made public. He also had regular access to inside information. In light of these facts, the FCA concluded that Mr Sebok was a PDMR for MAR purposes.
The FCA found that over a period of 19 months, Mr Sebok had breached Article 19(11) MAR by trading in Wizz Air shares on 18 separate occasions during closed periods. He had also failed to notify Wizz Air of 115 transactions in Wizz Air shares within three working days, or at all, and had failed to seek prior authorisation for the trades (as required by the Share Dealing Code).
When assessing the financial penalty to impose on Mr Sebok, the FCA determined that he had committed the breaches deliberately or recklessly. Relevant factors in this determination included that:
Other relevant factors in assessing the financial penalty included that Mr Sebok’s breaches were repeated across a large number of occasions, and his failure to notify Wizz Air resulted in Wizz Air being unable to notify the market of the PDMR transactions in the usual way.
Taking these (and other) factors into consideration, and having applied a 30% discount for early settlement, the FCA imposed a total penalty of £123,500 on Mr Sebok.
This FCA decision is a timely reminder for PDMRs of the importance of understanding, and complying with, the obligations that PDMR status brings. Failure to comply can result in serious financial penalties for the individuals involved.
Issuers must also comply with requirements under MAR to notify their PDMRs, in writing, of their obligations under Article 19. Although the FCA did not make any comment against Wizz Air in this regard, it did find relevance in the fact that Mr Sebok had not received any individual training on MAR or on his responsibilities as a PDMR. Issuers should consider providing relevant and tailored training to their PDMRs and to refresh that training at regular intervals.
The Government has published a response to its March 2024 consultation on a new regulated market for private company shares – the Private Intermittent Securities and Capital Exchange System (PISCES). The response sets out key features of the new trading framework and is accompanied by draft legislation implementing the PISCES “sandbox”.
PISCES forms a key part of the Government’s strategy to reinvigorate UK capital markets and drive growth and competitiveness in the financial services sector.
PISCES will provide a new regulatory framework for the intermittent secondary trading of shares in unquoted companies. It is not a trading venue in itself, but firms will be able to apply to the FCA to operate a trading platform within the PISCES framework.
PISCES will be subject to its own bespoke regulatory regime that will require changes to existing UK securities law and regulation. The new regulatory requirements will be developed within a financial services “sandbox” that will allow the framework to be tested during a five-year trial period.
PISCES will be open to any company whose shares are not already admitted to trading on a public market (in the UK or abroad). This would include both UK-incorporated private and public limited companies as well as overseas companies.
Individual operators of PISCES platforms may choose to impose admission requirements for their markets, including minimum corporate governance requirements.
PISCES platforms will operate as secondary markets and so can only be used to sell existing shares. They will not be used to support capital raising through the issuance of new shares.
To be eligible for trading within PISCES, shares should be freely transferrable and not admitted to trading on any public market in the UK or abroad.
Companies will not be able to carry out share buybacks on PISCES initially, but the Government will explore whether to allow this at a later stage.
During the sandbox trial phase, the Government intends to allow only the following categories of investor to purchase shares on PISCES:
It will be the responsibility of those taking orders to place trades on PISCES to “believe on reasonable grounds” that an investor meets the eligibility criteria.
Subject to the outcome of the sandbox phase, the Government will consider whether to widen PISCES participation to other retail investors.
Trading on PISCES will occur during trading windows that are set by the participating companies (but subject to operator rules). These windows could be weekly or monthly, for example, and there will also be flexibility as regards the duration of each window.
In a significant change from its original proposals, the Government has decided against creating a PISCES-specific market abuse regime based on the current public markets regime. Instead, the FCA will be given rule-making powers to create a new and bespoke disclosure regime for PISCES. Under this new regime, company disclosures and pre- and post-trade data will have to be shared with eligible investors participating in a PISCES trading event, but will not be required to be made public.
As there will not be a PISCES market abuse regime, there will also be no transaction reporting requirements. The FCA will, however, consider whether to set record-keeping rules.
Disclosures made by companies that are required or permitted by the FCA (or the rules of the PISCES operator), will be exempt from the financial promotion restrictions.
In relation to disclosure liability, the Government is proposing to introduce a PISCES-specific regime, which applies a stricter “negligence” liability standard to more certain information (e.g. past financial information). In contrast, a more lenient “recklessness” standard will be applied to inherently uncertain information, such as forward-looking statements.
As confirmed in the Autumn Budget 2024, PISCES transactions will be exempt from Stamp Duty and Stamp Duty Reserve Tax.
The Government has requested technical comments on the draft legislation by 9 January 2025, and subject to feedback, it intends to finalise the PISCES legislation by May 2025.
On 17 December 2024, the FCA published a consultation on the regulatory framework for PISCES, including a draft PISCES Sourcebook. The consultation sets out (amongst other things) the FCA’s proposals for the disclosure of information by PISCES companies, how PISCES operators must run trading events and the role of a PISCES operator in monitoring trading on its platform.
Feedback on the FCA’s consultation is requested by 17 February 2025, and the FCA is expecting to publish the final PISCES rules by May 2025. The FCA will also publish information in early 2025 for firms interested in applying to be a PISCES operator.
First published in Accountancy Daily.
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