In depth

Corporate update: the latest corporate law developments January 2022

Gateley Legal

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

  • consider the meaning of an “all reasonable endeavours” clause.
  • review changes to the UK listing regime aimed at boosting growth and innovation.
  • explain how to report a PSC discrepancy to Companies House.
Listen to this update via our 'Talking Business' podcast series

High court considers "all resonable endeavours" clause

The High Court has given some guidance on the effort required to satisfy a contractual obligation which required a party to use "all reasonable endeavours". The court said this required active endeavour and, in certain circumstances, it may require some sacrifice of commercial interests.

Endeavours obligations

Contractual obligations can either be absolute – where a party must do (or not do) a particular thing – or qualified – where a party must only try to do something, using its best or reasonable endeavours to achieve the desired result. The meaning of these phrases has been considered many times by the courts which have broadly decided that:

  • a reasonable endeavours clause requires a party to try to achieve the desired result by following one reasonable course of action;
  • a best endeavours clause requires a party to pursue every reasonable course of action in trying to achieve the desired result and, in doing so, to sacrifice its own commercial interests (although not to the point of ruination); and
  • an all reasonable endeavours clause falls somewhere between these two, requiring all reasonable courses of action available to be pursued but with the sacrifice of the party's own commercial interests being less likely. 

The facts

Brooke Homes (Bicester) Limited v Portfolio Property Partners Limited & ors [2021] EWHC 3015 (Ch) involved a dispute between a property owner and the developer it appointed in connection with a project to build an eco-town.

The property owner and the developer entered into heads of agreement under which, subject to various conditions including the grant of planning permission, the developer would acquire certain land from the property owner to build a development of residential homes.

Amongst other things the heads of agreement required the parties to use all reasonable endeavours to enter into a conditional sale agreement.

Two years after the heads of agreement had been signed, outline planning permission had been granted but the parties had failed to enter into the conditional sale agreement. As the relationship between them deteriorated, the developer issued proceedings against the property owner arguing, amongst other things, that it was in breach of its obligation to use all reasonable endeavours to conclude the sale agreement.

The decision

The judge found that the property owner was in breach of its obligations in the heads of agreement, depriving the developer of the opportunity to secure a sale agreement on beneficial terms.

In relation to the "all reasonable endeavours" obligation, the judge noted that this required active endeavour by the relevant party, with inactivity or passivity likely to be construed as a potential breach. The judge confirmed that the obligation required all reasonable paths or actions to be exhausted. When assessing whether or not a particular course of action was a reasonable one to take, the court would consider whether it would have a significant or substantial chance of achieving the desired result. If a path contained an insurmountable obstacle to achieving the desired result, it need not be taken.

On the question of whether a party had to sacrifice its own commercial interests to achieve the desired result, the judge said that this was less likely with an "all reasonable endeavours" obligation when compared with a "best endeavours" one. However, depending on the context and the precise wording used, some subordination of commercial interests could still be required in an all reasonable endeavours obligation.

Comment

The case is the latest in a long line of authority considering how far a party must go to satisfy a qualified contractual obligation. The comments are helpful in largely confirming what was understood to be the existing position. However, parties to contractual agreements can avoid the uncertainty of judicial interpretation by ensuring that their contracts set out in as much detail as possible the exact steps that must be taken, including the extent of any expenditure which must be incurred, rather than relying on generic obligations which could end up being overly-onerous or, alternatively, fail to achieve the desired result.

Changes to the listing rules to boost innovation and growth

The FCA has announced changes to the Listing Rules which, although aimed at boosting innovation and growth, will also have the effect of preventing smaller companies from being admitted to the Official List of the London Stock Exchange (LSE).

The changes form part of the government's response to the UK Listing Review, chaired by Lord Jonathan Hill, which reported in March 2021. That review considered how the UK could enhance its position as an international destination for IPOs given that the number of companies listed in the UK had fallen by around 40% since its peak in 2008 and that, between 2015 and 2020, the UK accounted for only 5% of IPOs ("initial public offerings") globally. 

Increased minimum market capitalisation

Under previous rules, a company wishing to be admitted to the LSE's Official List had to have a minimum market capitalisation (MMC) of £700,000. But, as this figure hadn't changed for almost 40 years, there were concerns that this was out of date given market value growth and that smaller companies would be better suited to markets such as AIM or Aquis where they will receive guidance from nomads or corporate advisers. 

So the MMC has been increased to £30 million with effect from 3 December. According to the FCA, in the last three years 75% of the cases where they have observed high share price volatility and received alerts of suspected suspicious trading were for companies with an MMC below £30 million. The FCA believes that increasing the MMC will reduce future harms arising from the high number of smaller companies that struggle to comply with their on-going regulatory obligations and which are subject to suspicious trading activity.

The requirement only applies to new companies listing after the rule change and is not a continuing obligation. There are also transitional measures for companies which are currently going through the IPO process so that those that had submitted a listing eligibility review to the FCA by 2 December 2021 could apply for a listing based on an MMC of £700,000 provided they have applied to list by 2 June 2023 (ie within 18 months of the rule change).

Reduced 'free float'

At the same time as increasing the MMC, changes to the Listing Rules will reduce from 25% to 10% the proportion of shares which a company on the Official List must have in public hands both on admission and as a continuing requirement. According to the FCA this would allow issuers more flexibility to structure their IPOs in the way that suits them. It will also mirror other listing destinations, such as the US or Europe, where a fixed percentage is either not required or is applied more flexibly.

Whilst there were concerns that reducing the free float could negatively affect liquidity, the FCA believes that this will largely be alleviated by the increase in MMC: 10% of the new £30 million MMC (£3,000,000) is considerably more than 25% of the current £700,000 MMC (£175,000). However, since the new 10% level will apply to all companies from 3 December it will be possible for a company which lists with an MMC of £700,000 before 3 June 2023 under the transitional provisions referred to above to have a free float of just £70,000.

It seems likely that many companies will choose to list with a free float of more than 10% in order to present investors with greater opportunities to buy and sell shares and, as a result, a less volatile share price.

Dual class share structures

The Listing Rules have not previously permitted companies to list with dual class share structures (DCSS) which give a class of shares a disproportionate level of control over the company compared to the economic interest of those shares. Such structures have become common in other jurisdictions, particularly the US, where company founders have been unwilling to give up control whilst wanting to access public equity to provide financing. Some famous examples of companies with DCSS include Ford, Google and Meta (formerly Facebook).

However, the FCA now believes that permitting DCSS will facilitate innovative growth companies listing on public markets at an earlier stage in their development which, in turn, will allow investors to participate in these companies as they grow. The new rules, which are designed to meet the needs of founder-led growth companies, will permit DCSS on the Premium Segment provided that:

  • there is a maximum weighted voting ratio of 20:1;
  • the shares carrying the weighted voting rights are only held by directors of the company (or beneficiaries of such a director’s estate);
  • the weighted voted rights are only available in two limited circumstances:
  • a vote on the removal of the holder as a director; and
  • following a change of control, in relation to a vote on any matter (to operate as a strong deterrent to a takeover); and
  • the weighted voting rights are only held by directors of the company.

Comment

These changes are part of the government's strategy to make London an attractive place for companies to list. The UK Listing Review identified as an issue the lack of future growth companies choosing to list in the UK, with a majority of the most significant companies listed in London being either financial or more representative of the 'old economy'. Concerns about the lack of flexibility in the Premium Segment was identified as a factor driving companies to list in other jurisdictions. It remains to be seen whether these changes will result in a boom of growth companies choosing to list in the UK.

New procedure to report PSC discrepancies at companies house

Companies House have introduced a new service which can be used by "obliged entities" to report a discrepancy about a beneficial owner on the PSC register. 

Background

The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 implemented the EU's Fifth Money Laundering Directive in the UK with effect from 10 January 2020. Under those Regulations, an "obliged entity" must notify Companies House if there is a discrepancy between the information on the publicly available PSC register and the information they hold about the beneficial owner of a UK company or limited liability partnership, or those Scottish partnerships which are subject to the PSC regime.

An "obliged entity" means any entity which is required to carry out due diligence checks for anti-money laundering purposes. So it includes auditors, external accountants, tax advisers and insolvency practitioners as well as banks, lawyers, trusts or company service providers and estate agents. Those entities are required to carry out customer due diligence checks (also referred to as "KYC" or "know your client") to verify the identity of the people they are dealing with. This includes checking the beneficial owners of those entities. 

Identifying discrepancies

If, as a result of the information it holds about a beneficial owner, an obliged entity notices that the information in the PSC register at Companies House is clearly incorrect then it must report that discrepancy. 
Reportable discrepancies could relate to:

  • the PSC's name, date of birth or nationality;
  • the PSC's country of residence or correspondence address; or
  • the nature of the PSC's control over the relevant company or entity.

In relation to the PSC's correspondence address it may be difficult to identify a discrepancy or, alternatively, easy to identify something as a discrepancy when that's not the case. This is because the address showing for a PSC on the public record is merely their service address and not their residential address which, although held by Companies House, is not publicly available. So the fact that a beneficial owner's address appears different to their notified address at Companies House does not automatically mean there is a reportable discrepancy.

Reporting a discrepancy

Any identified discrepancy must be reported as soon as possible via the new Companies House digital portal for this. Companies House will then investigate the discrepancy but will not inform the relevant company that the investigation is under way. Only if they find that the reported discrepancy needs to be corrected will Companies House then contact the company and ask them to make sure their PSC register is up to date.

Comment

The Companies House guidance confirms that when it comes to discrepancies in PSC information, they are interested in factual errors, such as a missing PSC or an incorrect address, rather than simple typing errors or spelling mistakes. It suggests that the latter minor errors are dealt with by advising the relevant company to contact Companies House to correct them.

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