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In this issue, the Company Law Memo Newsletter looks at how the Companies Bill will affect company transactions. |
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The new Companies Bill has attracted much comment for its sweeping changes to company law, but attention has largely been focused on contentious areas such as the codification of directors’ duties and the fair business review. Most professionals involved in corporate transactions, such as share and business sales, may be forgiven for thinking that the Bill is likely to be of minimal relevance to their everyday work. However, the 700-page Bill contains some less heralded reforms which will be of interest to transactional advisers.
This article considers the following areas of reform: - financial assistance; - execution of documents; - substantial property transactions; - directors’ long-term service agreements and payment for loss of office or employment; - reduction of share capital; and - takeovers.
Financial assistance See CLM: ¶5557+
The most significant reform for transactional advisers is that there will be no restriction on the ability of a private company to give financial assistance for the acquisition of its own shares, or those of its private holding company (a company can already give financial assistance to its subsidiaries). As a result, the whitewash procedure will become defunct. In fact, the new law will remove the need to consider financial assistance in all private company transactions.
This is a welcome development in this unsatisfactory area of law which only serves to increase transactional costs. Once the prohibition has been lifted, a private company target will be able to enter into a plethora of useful arrangements, including: - paying the buyer and/or seller’s transactional costs; - providing some of the consideration money (e.g. by making a loan to the buyer); or - providing security for the buyer’s borrowing (e.g. by entering into group security arrangements).
The prohibition will remain (in its current form, but restated in the new Bill) for assistance given by a public company.
Execution of documents See CLM: ¶3486+, ¶5741+
At present, company documents can be executed by the signature of either two directors or one director and the company secretary. As some readers may be aware, it will no longer be compulsory for private companies to have a secretary. As a result, the way in which companies execute documents will also be reformed. Under the Bill, a document will be validly executed by a company if it has been signed on its behalf by two authorised signatories, or by one authorised signatory in the presence of a witness who attests the signature (s 44).
Directors and public company secretaries will automatically become authorised signatories (s 281) and the DTI is consulting on transitional arrangements so that private company secretaries in office when the Bill becomes law will retain their power to sign documents. In addition, companies will be able to designate additional authorised signatories by sending the appropriate forms to Companies House. It is worth noting, however, that authorised signatories will have to be individuals.
This all means that, once the new provisions become law, advisers will have to check the status of the signatories to any transactional document. This could be done by a search at Companies House, or by inspection of the new Register of Authorised Signatories which will have to be maintained by a company at its registered office. In addition, the signature clause of any pro-forma documents or precedents will need to be amended to adopt the new nomenclature.
Substantial property transactions See CLM: ¶2567+
The substantial property transaction provisions become relevant where a transaction involves the transfer of a non-cash asset between a company and its director, the director of its holding company, or a person connected to such a director. This includes, for example, when a company purchases business premises from, or transfers shares in a subsidiary to, a director. At present, such transactions require prior shareholder approval if the value of the non-cash asset is over £100,000 or over £2,000 and 10% of the company’s net asset value.
Under the Bill, the minimum threshold will be raised from £2,000 to £5000, although the other thresholds will be unchanged (s 192). Where the thresholds are exceeded, the company will be able to enter into a conditional arrangement so that shareholder approval is obtained after the event (s 191).
Directors’ long term service contracts and payments for loss of office or employment See CLM: ¶2655+, ¶2962+
Often in company sales, new or retained directors are required to enter into new service agreements and exiting directors may be given a payment for the loss of their office (if the director is a shareholder, this may be more tax efficient than paying him for his shares). The Bill contains a couple of notable reforms in this area, perhaps as a response to criticism of “fat cat” directors.
Under the current law, a director’s service agreement for a fixed term of more than 5 years, which admittedly is rare in practice, must first be approved by the shareholders. Under the Bill, prior approval will be required for a service agreement with a guaranteed term of more than 2 years (ss 189, 190). This will include those for a fixed term of, say 18 months, and a further notice period of 6 months.
The Bill also makes it much more difficult for payments to be made directly to directors. Any payment to a director for the loss of his office or employment over £200 will first have to be approved by the shareholders (ss 214-221). The same will apply to payments made to anyone connected to a director, such as a spouse. Any payments made between 1 year before and 2 years after a company sale will be treated as payments for loss of office unless the parties are able to rebut that presumption. Collectively, these provisions could make it more difficult for exiting shareholder/directors to enter into tax planning arrangements, such as tax-free payments under compromise agreements.
Reduction of share capital See CLM: ¶1469+
Currently, a company wishing to reduce its paid up share capital, must obtain court approval. The procedure is lengthy and costly. Practitioners will be pleased to learn that the Bill introduces a new alternative reduction procedure for private companies (ss 655-658).
Under this new procedure, companies will have to make a statement regarding the solvency of the company for the following 12 months. The reduction will have to be approved by the shareholders within 15 days of the solvency statement. The resolution and statement will have to be filed at Companies House within 15 days of the resolution being passed and the reduction will have effect once this is done.
The new solvency statement is similar to the solvency statement that is currently required from the directors to whitewash prohibited financial assistance, and will therefore be familiar to practitioners. It is interesting to note that this has been resurrected in another area of company law given the demise of the whitewash procedure described above.
Takeovers See CLM: ¶6688+
The regulation of public company takeovers has been reformed on a Europe-wide basis by the Takeover Directive (EC Directive 2004/25). This should have been implemented into national law by 20 May 2006 and the relevant legislative provisions were originally set out in the Bill. However, when it became clear that the Bill would not become law before May 2006, the Government implemented the directive on an interim basis by way of the Takeovers Directive (Interim Implementation) Regulations 2006. These regulations only apply to takeovers of listed companies. When the Bill becomes law, these regulations will cease to have effect and the provisions of the Bill will apply.
Essentially, the Bill puts the regulation of all public company takeovers onto a statutory footing. The Takeover Panel will continue as the regulatory authority but will have increased statutory powers to ensure compliance with the Takeover Code. For example, it will have the power to require the disclosure of documents and information (ss 914-916) and order persons who breach the Code to pay compensation to disadvantaged shareholders (s 921).
The Bill also reforms the rights of the bidder and minority shareholders following a successful takeover offer. These rights give a bidder the right to buy out any minority shareholders (known as “squeeze-out” rights), and conversely, give any minority shareholders the right to require a successful bidder to purchase their shares (known as “sell-out” rights).
Under the Bill, both squeeze-out and sell-out rights will be available when the bidder acquires 90% by value of the shares to which the offer relates and 90% of the voting rights carried by those shares. When deciding whether the 90% threshold has been met on an exercise of squeeze-out rights, neither the bidder’s pre-offer shareholdings nor any conditional acceptances of the bidder’s offer will be counted. By contrast, on an exercise of sell-out rights, both the bidder’s pre-offer shareholding and any conditional acceptances will be counted in deciding whether the threshold has been reached. This means that sell-out rights will be easier to trigger than squeeze-out rights. In both cases, the right will have to be exercised within 3 months after the last day for acceptances of the takeover offer.
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TRANSACTIONS AND THE COMPANIES BILL |