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Corporate update: the latest corporate law developments March 2022

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This month we:

  • consider a case where Covid-19 was used as a basis for involving a force majeure clause;
  • review changes to the rules on financial promotions designed to protect consumers but which could reduce available investors; and
  • highlight a case summary in which investors claimed for misleading statements made by a company’s directors”

Force majeure and COVID-19

The High Court has held that a broadcaster was entitled to rely on a force majeure provision to terminate a media rights contract as a result of the Covid-19 pandemic.  The fact that both parties to the contract were affected by Covid-19 did not prevent the broadcaster from relying on the provision.

Force majeure

A force majeure clause is a contractual mechanism that typically excuses one or both parties from performance of a contract following the occurrence of certain events. When those events are outside of a party's control, the party may be released from its obligations under the contract.

A force majeure provision will usually detail the events that fall within its scope, though this list may not be exhaustive. The specified events will often include natural disasters such as earthquake and floods, as well as business related events such as strikes and industrial action. Whether or not an event falls within a specific provision will ultimately depend upon the drafting and interpretation of that contract.

Facts

In European Professional Club Rugby v RDA Television LLP [2022] EWHC 50, EPCR, a rugby competition organiser had granted RDA the media rights to two European rugby union competitions. RDA was due to pay EPCR a minimum guaranteed payment for the media rights plus a proportion of its revenue and EPCR was required to stage the competitions in a specified format during the contractual period.

The contract contained a force majeure clause that stated that neither party would be liable for any delay or total failure in performing its obligations if that delay or failure was caused by a force majeure event. The party "not affected" by the force majeure was entitled to give notice terminating the agreement if the affected party's performance had been prevented or delayed for more than 60 days.

The contract defined a force majeure event as:

"any circumstances beyond the reasonable control of a party affecting the performance by that party of its obligations under this Agreement including...…. epidemic, embargoes and labour disputes of a person other than such party."

Due to the Covid-19 pandemic, EPCR was unable to schedule certain of the competition fixtures before the end of the rugby season.  As a result, RDA served notice to terminate the agreement, relying on the force majeure provision.

Although both parties agreed that Covid-19 did constitute a force majeure event, EPCR argued that RDA could not rely on force majeure to terminate the contact as this was only permitted by a party "not affected by the force majeure event" and both it and RDA had been affected. It also alleged that RDA's real reason for serving a termination notice was to force EPCR into renegotiating the contract.  EPCR claimed wrongful termination and damages for breach of contract.

Decision

The Court dismissed EPCR's claim for wrongful termination of the contract and ruled that RDA had been entitled to terminate under the force majeure provision.

The phrase "the party not affected by the force majeure event" had to be read alongside the other relevant clauses in the contract and was simply referring to the party to whom the delayed performance was owed. It would be "commercially absurd" if RDA could not rely on the force majeure provision simply because it had also been affected by the same event.
The judge also noted that RDA's motive for terminating the contract was irrelevant – RDA would not be deprived of its contractual right to terminate even if its main motivation for doing so was to allow for a renegotiation of its licence fee.

Comment

This case is likely to be one of many where Covid-19 forms the basis for invoking a force majeure provision. Each contract will need to be interpreted based on its own wording and context, but this case usefully shows that a court will look to give a commercial common-sense interpretation to such provisions.  By their nature, force majeure events will often affect multiple parties to a contract. It would render these clauses almost unworkable if a party were to lose the right to terminate just because it had also been affected by the relevant event.
This case also clarifies that the motivation for invoking a force majeure provision is irrelevant provided that the party was contractually entitled to rely on that provision.

Interestingly, however, the judge noted that he was not able to consider whether RDA was under an implied duty to act in good faith when exercising its termination rights as this had not been raised as an issue by either party.  It remains to be seen whether parties will continue to have an unfettered right or will have to consider the reasonableness of their actions before deciding whether to terminate under a force majeure provision.

HM treasury consults on changes to UK financial promotions exemptions

The government is consulting on proposals to amend the financial promotion exemptions for high net worth individuals and sophisticated investors. The proposed reforms are intended to respond to the economic, social and technological changes that have occurred since the exemptions were introduced in 2001 and to ensure more effective consumer protection.  The consultation closes on 09 March 2022.

Background

The financial promotion regime in the UK prohibits an individual or business from communicating a financial promotion unless:

  • the content of the promotion is approved by an authorised firm;
  • the individual or business making the communication is itself authorised; or
  • an exemption to the regime applies.

The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) includes several exemptions that allow unauthorised persons to communicate financial promotions (such as an equity investment opportunity) in certain circumstances.

The government's consultation will consider three of these exemptions in the FPO:

  • certified high net worth individuals (Article 48 FPO)
  • sophisticated investors (Article 50) and
  • self-certified sophisticated investors (Article 50A).

These exemptions were introduced to enable small and medium sized enterprises to raise finance from sophisticated private investors or "business angels" without the associated cost of obtaining authorisation.

In the 15 years since they were last reviewed, there have been significant developments which have changed the context in which these exemptions must be viewed.These include the development of the online retail investment market, changes to rules around pension fund withdrawal and price inflation. A significantly higher number of consumers now fall within the scope of these exemptions than would have done when they were first created.

There has also been historic misuse of certain exemptions leading to investors being marketed products without the proper regulatory protections. As a result, the government is consulting on various changes to these exemptions to bring them up to date and to mitigate the risk of them being misused.

Proposals for change

The government believes that the exemptions for high net worth and sophisticated investors should be retained and has suggested the following five proposals to achieve its reform objectives:

  1. Increasing the thresholds for high net worth individuals: the proposal is to increase the annual income and net asset thresholds by at least inflation. This would result in the net income threshold increasing from £100,00 to £150,000 and the net asset threshold from £250,000 to £385,000. The government believes, however, that there is a case for increasing the thresholds beyond this inflationary figure and is seeking views on appropriate levels. No change is proposed to the assets in scope of the net asset calculation (which currently exclude, for example, an investor's primary residence and any pensions benefits).
  2. Amending the criteria for self-certifying as a sophisticated investor: the government is proposing to remove the ability to self-certify based on having made more than one investment in an unlisted company in the previous two years. The ease with which individuals can now invest in unlisted companies online means that this condition is no longer an indicator of investor sophistication. The criteria of being a director of a company with an annual turnover of at least £1 million will also be updated to require at least £1.4 million of annual turnover.
  3. Placing a degree of responsibility on firms to ensure individuals meet the criteria to be deemed high net worth or sophisticated: currently, firms that make promotions under the high net worth or self-certified sophisticated exemptions need only "believe on reasonable grounds" that the relevant individual has signed the requisite statement. They are not required to check that the individual actually meets the criteria. To remedy this and to reduce the risk of misselling to investors, the proposal is that firms must have a reasonable belief that an individual meets the relevant criteria and not simply that they have signed the relevant statement.  The consultation offers no guidance on how firms should reach this conclusion or how it should be documented.
  4. Updating the high net worth individual and self-certified sophisticated investor statements: the government is proposing changes to the self-certified investor statements to encourage investors to engage with the statement contents more thoroughly. The hope is that this will reduce the number of individuals self-certifying incorrectly. The language in the statement will be simplified and its format updated to make the criteria for self-certification more prominent. Investors will also have to select which specific criteria they meet and set out how they meet that criteria.
  5. Updating the name of the high net worth individual exemption to remove the reference to "certified": the current "certified high net worth" exemption will be renamed to the "high net worth individual" exemption to reflect that these investors have not required third party certification since 2005.

Comment

The proposals in the government's consultation are to be welcomed if they achieve their intended aim of reducing potential harm to consumers. 
Although the proposals to increase financial thresholds and tighten other exemption criteria may reduce the number of available investors, there should be increased confidence that self-certified investors will have the necessary experience to invest and adequate resources to absorb any losses.

It will be particularly interesting to see how firms approach proposal 3 (above) as this puts more responsibility on firms to ensure that individuals meet the relevant exemption criteria. It remains to be seen how firms will evidence their reasonable belief that an investor meets the criteria without asking for additional information and if requested, what information (if any) investors will be willing to supply.

Shareholder claims for untrue or misleading statements - the autonomy case

On 28 January 2022, Mr Justice Hildyard released a summary of his long awaited judgment in the case of Autonomy Corporation Ltd and Others v Michael Richard Lynch and Another. When issued in 2015, this was the first claim to go to trial in relation to section 90A/Schedule 10A Financial Services and Markets Act 2000 (FSMA).  Although the full judgment is yet to be published, the summary provides useful pointers to some of the section 90A issues that the full judgment will hopefully clarify.

Section 90A/Schedule 10A FSMA claims

Broadly, a section 90A claim can be brought by an investor in UK-listed securities against an issuer if:

  • the issuer has published an untrue or misleading statement or omitted to include a material fact in its published information;
  • a person discharging managerial responsibilities (PDMR) within the issuer knew the statement was untrue or misleading or was reckless as to that fact. In relation to omissions, the PDMR must have known the omission to be a dishonest concealment of a material fact;
  • the investor acquired, disposed of or continues to hold securities in reliance on the published information; and
  • the investor suffered loss in respect of the securities as a result.

The basis of liability for a section 90A claim is fraud and, in most cases, the PDMRs will be directors of the issuer.

Facts

The case arose out of the acquisition by Hewlett Packard (HP) of the entire issued share capital of Autonomy in 2011 for approximately $11.1 billion. At the time of the acquisition, Autonomy was a market leader in enterprise technology and was listed on the London Stock Exchange.

Although the acquisition led to several proceedings both in the US and UK, by far the largest of the claims was brought under section 90A/schedule 10A FSMA.  That claim was brought by HP (with Autonomy's successor company) against Dr Lynch - the founder and former CEO of Autonomy, and Mr Hussein - Autonomy's former CFO (together the Defendants).

A section 90A claim can only be brought against an issuer, but that would have resulted in HP bringing a claim against Autonomy, a company it now owned. To avoid this, HP's claim was in the nature of a "dog leg claim".

This involved:

  • Autonomy voluntarily accepting liability for the $4.55 billion claim brought by HP in respect of losses it suffered having been induced to enter into the acquisition; and
  • Autonomy then blaming and suing the Defendants (both PDMRs of Autonomy) for that loss.

Dog leg claims are possible in these circumstances as FSMA allows an issuer to lay off its own liability by suing its PDMRs on the basis that they were responsible for (or at least had knowledge of) the false statements.

For HP's section 90A claim to be successful, it had to establish that Autonomy was liable as issuer to HP (Autonomy's voluntary admission of liability did not bind the Court) and then that the Defendants were liable as PDMRs to Autonomy.

HP claimed that Autonomy had fraudulently published information relating to six areas of its business and accounting and that HP had relied on this information when making its investment decision.

HP also claimed that the Defendants, as PDMRs, knew that published information to be untrue or misleading.

Summary of decision

As referred to above, only a summary of the Court's decision has currently been published and the full judgment (expected to be over 1500 pages long) is still pending.

The summary does indicate that HP substantially succeeded on liability and was successful in respect of five of the six heads of its section 90A claim. Mr Justice Hildyard has not, however, reached any conclusions on quantum of damages, but has suggested that the final figure will be substantially less than claimed.

Although the summary does not provide any detailed analysis into the judge's decisions, it does provide some useful pointers as to issues that are likely to be clarified in the full judgment. These include the following:

  • The judge notes that there is no defence to a s90A or fraud claim on the basis that a claimant had the means of discovering the truth. Even if the claimant could have uncovered relevant information by conducting more or better due diligence, this would not amount to a defence. This suggests that the ease or means of discovering the truth (if any) has no bearing on whether it is reasonable for a claimant to rely on an untrue or misleading statement.
  • In contrast to the above, the judge confirmed that if a claimant had been aware before the acquisition of the matters that formed the basis of its claim, then the claimant could not be said to have reasonably relied on the untrue statement.
  • There has been considerable uncertainty as to how a Court would deal with areas of commercial or accounting judgement when determining whether published information was misleading. The judge in this case has usefully confirmed that one of the heads of the section 90A claim failed because the claimants had not shown that certain accounting treatment "was wrong rather than a matter of accountancy judgment on which views might properly differ." It is hoped that the full judgment will provide guidance on how materially misleading a statement must be to be considered "wrong" so as to fall within scope of section 90A.

Comment

The final judgment, when published, will be of great interest. 

Although there have been other section 90A proceedings since the Autonomy claim was first issued, these have mainly been mass shareholder claims. The Autonomy case, involving one principal shareholder, amounts to a very different scenario that brings with it differences in causation and reliance.

These issues have yet to be fully explored in a judicial setting and it is hoped that the full Autonomy judgement will provide much needed guidance in the context of section 90A claims.

First published in Accountancy Daily.

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