In depth

Corporate update: the latest corporate law developments August 2021

Gateley Legal

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In this month’s update for directors, secretaries and general counsels we:

  • consider the extent of the duty of care owed by an auditor or other professional adviser;
  • explain the new digital process for stamping documents; and
  • review the latest guidance on the government’s new powers to intervene in transactions on grounds of national security.

Supreme Court clarifies adviser's duty of care

The Supreme Court has given guidance on the extent of the duty of care owed by professional advisers, holding that the scope of that duty is governed by the purpose of the duty.

The SAAMCO principles

The approach to establishing the scope of an adviser's duty of care was laid down in South Australia Asset Management Corp v York Montague Ltd [1997] AC 191 (known as the SAAMCO case). In that case, the court said that, in the context of information in an inaccurate valuation, only those losses that were attributable to the breach of duty by the valuer were recoverable. In order to be so attributable the loss must come within the scope of the duty owed by the adviser.

The court drew a distinction between providing "information" and providing "advice":

  • where the adviser simply provides information to enable someone else to decide on the relevant course of action, the adviser will only be responsible for the consequences of the information being wrong and will not generally be liable for all consequences of the course of action taken; and
  • where the adviser actually advises someone on which course of action they should take, then the adviser must take reasonable care to consider all the consequences of the course of action. If the adviser is negligent, it will be responsible for all the foreseeable loss which is a consequence of that course of action having been taken.

In the most recent case, Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 the Supreme Court said that this distinction between information and advice had "not proved to be satisfactory".

The facts

The case involved Grant Thornton which had acted as the Society's auditors until 2012. They advised the Society that its accounts could be prepared on the basis of "hedge accounting". Relying on that advice, the Society entered into long-term interest rates swaps as a hedge against the cost of borrowing money to fund part of its mortgage business.

But the advice from Grant Thornton was incorrect and negligent. In 2013, when Grant Thornton realised its mistake, the Society had to restate its accounts which showed substantially reduced assets and insufficient regulatory capital. In order to rectify the situation, the Society had to close out the interest rates swaps early at a cost of more than £32m.

The Society then attempted to recover that cost from Grant Thornton by way of damages in respect of their negligent advice.

The decision

Whilst the High Court and the Court of Appeal both refused to allow the Society to recover the cost of closing out the swaps early, the Supreme Court allowed the Society's appeal. The court held that the Society had suffered a loss which fell within the scope of the duty assumed by Grant Thornton, taking into account the purpose for which Grant Thornton gave its advice about hedge accounting.

The court said that the scope of the duty of care assumed by a professional adviser was governed by the purpose of the duty. That purpose had to be judged on an objective basis by reference to the reason why the advice was being given. As the court said "One looks to see what risk the duty was supposed to guard against and then looks to see whether the loss suffered represented the fruition of that risk". The court said that the distinction between "information" and "advice" identified in SAAMCO was not a rigid rule and that the focus should be on identifying the purpose of the duty of care assumed by the relevant professional adviser.

In this case, the court said that the purpose of Grant Thornton's advice was to establish whether the Society could use hedge accounting to implement its proposed business model for its lifetime mortgages within the constraints of the relevant regulatory framework. Grant Thornton advised that it could, but that advice was negligent. On the basis of that negligent advice, the Society entered into the swap transactions and was exposed to the risk of loss in breaking those swaps when it realised hedge accounting could not be used. As a result the Society was exposed to regulatory capital demands which the use of hedge accounting was supposed to avoid. That risk was one which Grant Thornton's advice was supposed to allow the Society to assess and which its negligence caused the Society to not understand.

So the loss fell within the scope of the duty of care assumed by Grant Thornton in the light of the purpose of its advice. As a result, Grant Thornton was liable for the loss suffered by the Society in breaking the interest rate swaps. However, the court reduced Grant Thornton's liability by 50% due to the Society's contributory negligence which arose from its mismatching of mortgages and swaps.

Comment

As the Supreme Court noted, the distinction between information and advice laid down in SAAMCO can lead to cases being shoe-horned into one of those categories. But often professional advice involves elements of both. The Supreme Court's focus on the purpose of the advice being given seems a more straightforward approach.

Digital stamping processes made permanent

HMRC has confirmed that the digital process for stamping stock transfer forms and other documents implemented in response to the Covid-19 pandemic has been made permanent, bringing to an end the 300 year old process to stamp documents manually.

Original stock transfer forms must now be submitted to HMRC by email within 30 days of being signed and dated.  At the same time as submitting the documents by email, the appropriate duty must also be paid to HMRC – a document will not be processed for stamping unless the relevant duty has been received. It's important to ensure that the reference attributed to the payment is the same as that attributed to the documents submitted by email in order to enable HMRC to match the relevant duty payment to the relevant document.

Following stamping, HMRC will send a letter containing a verification code which acts as a "digital stamp" in place of the old physical stamp. HMRC's letter confirms receipt of the stamp duty, details the transactions it is confirming receipt for and the verification code, and confirms that the stock transfer form or instrument of transfer has been duly stamped so that the registrar may register the new ownership of the shares. Once received, the letter and stock transfer form should then be submitted to the company secretary or registrar for registration. Going forward, the letter should be kept with the stock transfer form in order to evidence that duty has been paid. Annotating the form with the verification code would also provide protection if the letter and form are ever later separated.

As well as stock transfer forms, the digital stamping process applies equally to a form SH03 recording a purchase of own shares. Companies House have updated their guidance to confirm that the letter from HMRC confirming that duty has been paid must be submitted with the form SH03 when it is sent to Companies House for filing. 

Comment

In a welcome move, HMRC has also confirmed that where a document has been stamped digitally since March 2020 under HMRC's previous temporary procedure, there is no need to re-submit it for stamping under the new permanent procedure. In another change to the previous process, HMRC have confirmed that they will now accept electronic signatures on documents for stamping.

Government guidance on the new transaction intervention powers

The National Security and Investment Act 2021 gives the government new powers to intervene in transactions on the grounds of national security. Although the Act received Royal Assent in April 2021 it is not yet in force, pending publication of various pieces of secondary legislation required to give full effect to its provisions. The government has now issued a first draft of a key set of regulations under the Act together with a statement on how the government intends to exercise its call-in powers.

The new regime

There are three key elements to the new regime under the Act:

  • a mandatory notification regime for some transactions in certain specified sectors;
  • a voluntary notification regime for certain transactions which may give rise to a risk to national security; and
  • call-in powers under which the government can review transactions which should or could have been notified under either of the above regimes.

Sector definitions for mandatory notifications

The draft National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 contain the definitions of the 17 specified sectors in which the mandatory notification regime will operate. A qualifying transaction in one of these sectors will not be able to complete until clearance has been received from the new Investment Security Unit within BEIS. Any notifiable transaction that completes without such clearance will be void.

The sector definitions have been further refined after targeted engagement with stakeholders following the publication of the government's response to its earlier consultation on the definitions. Whilst the majority of these are in substantially the same form as in that consultation, some of them have been redrafted. For instance, the "Energy" section has been redrafted and expanded; "Suppliers to the emergency services" has been expanded so it no longer relates simply to "critical" suppliers; and the "Communications" sector has been redrawn to target public communications networks and services as well as providers of submarine cable systems.

Exercise of call-in powers

The statement on the exercise of the call-in powers confirms that transactions in the 17 specified sectors are more likely to be called in for review as these are considered to be areas in which risks to national security could be more likely to arise. Similarly, transactions in areas of the economy which are closely linked to those sectors, but which are outside the mandatory notification regime (for example, because they are related to data infrastructure but are not strictly within that sector definition), are also more likely to be of interest. 

The statement confirms that transactions which are outside the specified sectors are "unlikely" to be called in as national security risks are expected to occur less frequently in these areas.

The factors that the government will take into account when deciding whether or not to exercise its call-in powers have also been clarified in the statement. These are confirmed as being:

  • The target risk – that is whether the target is being, or could be, used in a way that poses a risk to national security.
  • The acquirer risk – that is whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from it having control of the relevant target.
  • The control risk – that is whether the amount of control that the acquirer will gain from the transaction poses a risk to national security.

Where one or more of these risk factors arises, the transaction is likely to be called-in for review. Again, however, the government confirms that for most transactions it anticipates that the overall consideration of these risks is expected to indicate a low risk to national security and therefore a low risk that of call-in.

Comment

The government has also published a guidance note for businesses aimed at helping them prepare for the new regime. 

The reassurances from the government that it expects to use its powers to intervene in transactions sparingly will be welcomed. However, until the regime is fully in force and parties can see how it operates in practice, it still seems likely that we will see an increase in precautionary voluntary notifications in order to avoid the more drastic consequences of failing to notify when required.

The government has also confirmed that the new regime will come into force on 4 January 2022. However, transactions entered into before that date can be called in for review once the new regime is in force. Parties are able to get informal guidance from the Investment Security Unit on those transactions in order to assess the likely risk of them being called-in.

Would you like more information? 

For more information regarding these developments, please contact our expert listed below or visit our Corporate page for more information on the services that we offer. 

Gateley Plc is authorised and regulated by the SRA (Solicitors' Regulation Authority). Please visit the SRA website for details of the professional conduct rules which Gateley Legal must comply with.

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