UK: Salans Commercial Thinking

Last Updated: 4 January 2013
Article by Richard Thomas, Tatiana Kruse, Jonathan Edgelow and Lydia Sadler

Welcome to the winter 2012 edition of Salans Commercial Thinking. In this edition, we have selected some of the most noteworthy developments in UK commercial law over the last quarter including case studies and changes in regulation.

1. The Bribery Act – A Refresher

The Bribery Act 2010 (the "Act"), which came into force just over a year ago on 1 July 2011, is arguably the most robust anti-corruption legislation in the world. It has a wide reach, affecting all companies that do business in the UK or employ British citizens.

Summary of the Offences

The Act provides that a person is guilty of an offence where:

  • They offer, promise or give a financial advantage to another person with the intention of causing that other person to improperly perform, or rewarding that other person for improperly performing, a public or commercial function in any jurisdiction.
  • There is an expectation that the relevant function is carried out in good faith or where the person performing it is in a position of trust.

It does not matter whether the recipient of the bribe is the same as the person who is to perform, or has performed, the relevant function. It is an offence for a person to request, agree to receive or accept (either directly or through any other party) a financial or other advantage in connection with the improper performance of a relevant function.

The Corporate Offence

A company or partnership incorporated or operating in the UK may be guilty of any of these offences if a person associated with that organisation takes the offending action. A person performing any services for an organisation (for example, as employee or agent) may be associated with that organisation.

It will be a defence if the commercial organisation can show that it had adequate procedures in place designed to prevent such offences being committed, although there is no current guidance on what may constitute 'adequate procedures'. Senior officers of the organisation may also have personal liability if an offence is committed.

Practical Steps

Commercial organisations should update their compliance procedures to reflect the new legislation. Depending on the size of the organisation, suggested steps include:

  • Reviewing current business practices and relationships with public bodies.
  • Implementing a code of conduct and statement of values.
  • Producing a detailed anti-bribery policy which could include guidance on hospitality, political donations, lobbying and whistleblowing procedures.
  • Providing employees with access to training and guidance.
  • Ensuring that effective internal monitoring procedures exist to deter and detect any breaches of the law.
  • Including in commercial contracts the standard clauses prohibiting bribery and corruption that are commonly found in public sector contracts.

2. Shorter Prospectuses for SME's

When transferable securities are offered to the public or admitted to trading on an EU regulated market, the Prospectus Directive requires that a prospectus is published. A prospectus gives details of the relevant securities and the company that is issuing them and must be approved by a competent authority before publication. The competent authority in the UK is currently the Financial Services Authority.

There has been concern that the information required to be contained in a prospectus, as set out in the 'PD Regulation', is unnecessarily onerous in certain circumstances. Following a review by the European Commission, an Amending Directive was published. One of the primary objectives of the amendments is to streamline the capital-raising process for companies in various circumstances. The Amending Directive has been implemented into the UK via the publication of the Prospectus Regulations 2012. The key changes are:

  • As from 1 July 2012 less information will need to be included in a prospectus published in connection with a 'pre-emptive offer of shares' by a company admitted to trading on the Main Market of the London Stock Exchange or the AIM Market. A 'pre-emptive offer of shares' is a 'rights' or 'bonus' issue, being one made in compliance with statutory pre-emption rights (requiring that new shares be offered to existing shareholders before they are offered externally).
  • Less information will also need to be included in a prospectus published by 'small and medium sized enterprises' (SMEs) and 'Main Market small cap' companies. SMEs are companies that have any two of: (i) less than 250 employees; (ii) a total balance sheet of less than €43 million; and (iii) an annual net turnover of less than €50 million. 'Main Market small cap' companies are listed companies that have had an average market capitalisation of less than €100 million for the last three years.
  • The scope of the exemption in the Prospectus Directive that permits an offer of securities to employees without the need for a full prospectus is being widened so that more companies will be able to offer shares to their EEA-based employees without having to produce a prospectus. This will assist with the structuring of employee share plans.
  • The summaries which appear in the front of a prospectus will (in most cases) be required to contain additional information, and the method of display of that information will be more regulated. It will also be an offence for key information to be left out of the summary.
  • Where securities are offered to retail investors by financial intermediaries, it will be clearer who is legally responsible for information provided to investors, and on what terms financial intermediaries are authorised to resell or place securities on the basis of the issuer's prospectus. The issuer will be required to specify which intermediaries have its permission to use the prospectus to market the securities and how long such permission lasts. Authorised intermediaries will be able to pass any responsibility for the information to the issuer, but unauthorised intermediaries may face responsibility themselves.

Please contact us if you would like to receive further information on any of the above points or any other changes introduced by the recent changes to the Prospectus Directive introduced by the Prospectus Regulations 2012.

3. London as a Centre for Renminbi Business

China's international trade has developed significantly to make China the second largest economy in the world. However, the growth of China's economic power has not been equalled by the international use of its currency, the renminbi ("RMB"), which is still subject to tight currency controls. China has now begun to support the use of the RMB outside mainland China with a view to it ultimately becoming a fully convertible global currency.

Future growth

With the likelihood of a new global currency emerging of a size and international significance equal to the US dollar and the euro, there has unsurprisingly been substantial interest in the effects on London. London's position as the world's leading international finance centre and China's desire to develop the RMB into a world currency pose an opportunity for both parties.

The Chinese and the UK governments have embraced the private sector's interest in developing the RMB market in London. The City of London has established a group of leading international banks with a strong presence in London and Hong Kong to support the growth of RMB business in London. The vision for the initiative is for London to develop as a "western hub" for the international RMB market, as a complement to Hong Kong and other financial centres.

As awareness of RMB denominated products and services develops amongst corporate and institutional customers, volumes can be expected to increase and further RMB denominated products and services will be offered by banks and financial institutions in London. London can expect to extensively increase its business volumes in areas such as corporate and institutional banking.

The Pilot Scheme

The RMB Cross-border Trade Settlement Pilot Scheme (the "Scheme") was launched in 2009. Key points to note arising from this include:

  • The Scheme will support a long term sustainable RMB market in London, to make trade processing easier for corporates and offer customers and investors the chance to invest, trade, bill and bank in RMB.
  • The Scheme implies a policy preference for a steady appreciation of the RMB over time, creating interesting investment opportunities.
  • Expanding RMB cross-border trade elevates the importance of foreign exchange hedging for corporates globally.
  • Combined with initiatives to allow foreign companies to issue RMB bonds and initial public offerings, the Scheme implies a sharp slowdown in China's dollar accumulation in the coming years.
  • The use of RMB for trade settlement will likely make Chinese importers and exporters more competitive by lowering their costs and exchangerate risks. Therefore the export recovery in China is likely to be quicker and stronger than in many other countries in the near future.

In April 2012, HSBC announced the first international renminbidenominated bond outside Chinese sovereign territory.

4. Corporate Manslaughter – Beware

The Corporate Manslaughter and Corporate Homicide Act 2007 came into force on 6 April 2008. The Act established a new criminal offence which applies to incorporated bodies, partnerships, trade union and many government bodies.

Broadly, under the Act, an organisation (which includes most employers) will be guilty of an offence if the way in which its activities are managed or organised (by its senior management) causes a person's death and this amounts to a gross breach of a relevant duty of care owed by the organisation to the deceased.

In July 2012, Lion Steel Limited became the third company in the UK to be convicted of the offence of corporate manslaughter under the Act. The case concerned the death of a man in 2008, who died following a fall through a fragile roof panel.

Lion Steel was sentenced to a fine of £480,000 which is the highest fine to date. The two companies previously convicted of this offence, Cotswold Geotechnical Holdings Limited and JMW Farms Ltd received fines of £385,000 and £187,500 respectively.

The Sentencing Guidelines Council published guidance in 2010 which suggests that the appropriate fine for corporate manslaughter should rarely be less than £500,000 and could reach into the millions. The fine imposed on Lion Steel is therefore more closely aligned with the sentencing guidelines, although it should be noted that it is also the largest of the three companies convicted.

Directors of UK companies need to be increasingly aware of this new criminal offence. It is recommended that a company to which the legislation applies reviews its internal policies and practices to ensure that it identifies all duties that it may owe to employees and third parties, and that it can best protect against any breach of these duties.

5. Side Letters

Side letters are often encountered in corporate transactions, for example:  As an add-on to an agreement to vary, clarify or supplement its terms. This often happens at the last minute when it's too late to revise the main agreement formally or where there has been an "eleventh hour" negotiation compromise.

  • To allow the parties to a transaction some "breathing space" to finalise certain aspects ancillary to the core deal.
  • As a "stop gap" where certain preliminary or transitional acts need to be performed prior to the transaction taking full effect.

When disputes arise, the binding nature of such side letters is regularly called into question. Un-surprisingly the answers can be found in the basic laws governing the formation of contracts:

  • Offer and acceptance;
  • Intention to create legal relations;
  • Consideration; and
  • Certainty.

The recent case of Barbudev –v- Eurocom Cable Management Bulgaria EOOD and others illustrates how careful deal-makers and their lawyers must be when relying on side letters.

In that case, Mr Barbudev negotiated to sell his company to the private equity fund, Warburg Pincus, which then intended to merge it with another company. As part of the deal Mr Barbudev wanted to acquire a minority stake in the newly-merged company. The negotiations for the sale took priority and, when it became clear that there would be no time to agree the terms of the minority investment before closing, the parties agreed on a side letter. This was prepared by Warburg Pincus' lawyers and provided that, "in consideration of" Mr Barbudev agreeing to sell his company, the buyer agreed "as soon as reasonably practicable after the signing" to offer Mr Barbudev "the opportunity to invest in the purchase on the terms to be agreed between us" to be set out in an investment agreement which the purchaser agreed to negotiate "in good faith".

The Court of Appeal held that, whilst there was an intention to create legal relations (evidenced by the legalistic language of the side letter drafted by Warburg Pincus' lawyers), the letter was just an "agreement to agree" and was therefore not legally enforceable. In particular the terms of the proposed investment agreement were not clear enough to form a basis for an obligation to negotiate.

This case serves a warning to deal-makers and their lawyers to "go the extra mile" when drafting important side letters. To reduce the risk of a Court holding a side letter unenforceable:

  • Labelling it as a "letter of intent" or "comfort letter" or "subject to contract" should be avoided.
  • Instead, express language should be used to indicate that the letter is intended to be legally binding.
  • The consideration should be specified within the text of the letter, for example, entry into the main agreement or willingness to perform preliminary works.
  • If the consideration is unclear, illusory or in the past, then the letter should be executed "as a deed".
  • The terms must be clear and unambiguous, allowing no scope for prevarication. Leaving something "to be agreed" even if "in good faith" is likely to be fatal.
  • Consider using "agreed form" templates where contractual terms are to be entered into but avoid generalised checklists and skeleton terms as these leave too much open for dispute.
  • If specific terms still need to be ironed out, provide for a "default provision" which will automatically apply if the parties cannot find a compromise within a set timeframe.

Above all remember the basic laws governing the formation or contracts and emphasise clarity over commerciality.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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