UK: Corporate Focus - Autumn 2014

CORPORATE TRANSPARENCY

By Faisal Buali

The need for companies to know their shareholders – and the potential penalties on shareholders who provide inaccurate responses.

The Court of Appeal recently held in JKX Oil & Gas plc v Eclairs Group Limited that a board's power to prevent shareholders from voting at a general meeting, exercised by the board in the belief that such shareholders had responded inaccurately to notices for requests for information, may be exercised by the board regardless of the purpose for which that power was exercised.

Relevance for private limited companies

  • This judgment related to the service by a premium listed company of a request for information about interests in its shares, known as a section 793 notice, on certain of its shareholders – but it may well become relevant for private limited companies too
  • This is because the Government plans to introduce a register of persons with significant control for all UK companies, whereby all companies will be under an obligation to take steps to identify their major beneficial owners and to maintain a register of such owners
  • To give companies the necessary power to do so, the Government is proposing to extend the provisions giving public limited companies the ability to require information about their shares to private limited companies (with some modifications)

Relevance for premium listed companies

  • For premium listed companies, the use of section 793 notices is likely to increase in scope and importance given the recent enactment of the Listing Rules (Listing Regime Enhancements) Instrument 2014
  • Pursuant to these rules, premium listed companies are now under an obligation to enter into relationship agreements with controlling shareholders containing certain provisions safeguarding the company's independence
  • A "controlling shareholder" is defined as any person who exercises or controls 30% or more of the voting rights, either on their own or with a person with whom they are acting in concert
  • As such, premium listed companies are under an obligation to take steps to identify any concert parties who are interested in their shares with whom their shareholders are acting in concert, which they are able to do with the use of their powers under section 793

Relevance for shareholders

  • Shareholders who receive section 793 notices should be aware that they are at risk of being disenfranchised if they do not respond to such notices with accurate information

EMPLOYMENT

By Charles Urquhart

The trouble with acquisitions – holiday pay.

On 4 November 2014, in a flurry of media excitement, the Employment Appeal Tribunal (EAT) ruled that holiday pay needs to take overtime into account.

This EAT decision followed a judgment by the European Court earlier this year which stated that holiday pay must reflect "normal remuneration". As a result, if sums which an employee receives whilst at work are not replicated when they are on holiday, this will be a breach of EU law.

The EAT decision is particularly relevant for companies seeking to purchase businesses or assets as such transactions will trigger certain employee protections under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended) (TUPE). Where TUPE applies, past holiday pay liabilities will transfer to the new employer.

Similarly, employers who, by way of corporate purchases, are inheriting staff who are paid commission, overtime and even bonuses, should make sure that they fully understand what they are taking on, both in terms of potential backdated claims, and, whether there will be the need to recalculate holiday pay going forward. This extra liability may of course have an impact on the pricing of a business or the costs of the services to be provided.

Much of the reason for the media hype was the fear that this could generate backdated claims for underpaid holiday pay going back to 1998, costing employers millions. Whilst these fears have mostly been allayed by the EAT's decision to restrict the ability for employees to bring claims for holiday pay from previous years, the risk remains that the decision, particularly in relation to this employer-friendly restriction on back-pay, may be overturned if appealed.

A Government task force has been created to consider the impact of the EAT case on employers and we await to hear whether the judgment will be appealed.

The risk of underpaid holiday arises not just in relation to overtime. In the European Court case earlier this year it was decided that holiday pay must account for commission also. There remain questions over how you calculate holiday pay in relation to commission, but this will be litigated before the Employment Tribunal in the New Year.

EXTRACTIVE INDUSTRIES

By Isabelle Desgranges

New obligation on the extractive industries to disclose payments to Government entities.

UK companies in the extractives industries must provide Companies House with a report on the payments they have made to Government entities for any financial year starting after 1 January 2015. Directors of a defaulting company may be liable to an unlimited fine and/or a prison sentence of up to two years.

The report must detail:

  • Which countries received payments
  • The amount paid to each government
  • The type of payments made – that is, taxes, royalties, bonus, licence fee, production entitlements, or dividends
  • A breakdown of payments by project

This requirement has arisen because of the publication by the Department for Business Innovation & Skills (BIS) of its response to consultation in relation to the UK implementation of the EU Accounting Directive's Chapter 10, which relates to extractives industry reporting.

BIS has stated that only the prospect of criminal sanctions for the directors of defaulting companies would achieve the aim of compliance to the new regime. It is no defence for a company to point to a confidentiality clause within its agreements with the relevant Governments.

The UK will implement the provisions of Chapter 10 from 1 December 2014, well in advance of the deadline of 20 July 2015 set out in the Accounting Directive. The UK has recently become a candidate country to the Extractive Industries Transparency Initiative, and by becoming an "early adopter" may wish to demonstrate its commitment to transparency in this sector and to lead by example.

Companies have 11 months from the end of their financial year to deliver the reports, so the first reports can be expected towards in the third quarter of 2016.

On 5 November 2014 BIS published draft guidance prepared by The International Association of Oil and Gas Producers and The International Council on Mining and Metals in relation to the new reporting obligations. The guidance is out for consultation only at this stage (consultation closes on 17 December 2014). It provides detailed information to companies in the extractives industry about which entities are covered by the new rules, what they are required to report and the timing and process for reporting.

The new regulations have yet to be finalised but are expected to come into force on 1 December 2014 and will apply to companies in the extractives industries which are:
  1. large limited liability companies registered in the UK, which are those which meet at least two of the three following criteria:

    • balance sheet total in excess of GBP 18 million
    • net turnover in excess of GBP 36 million
    • over 250 employees on average over the course of the financial year
  2. all "public interest entities", defined as including (among others) companies listed on a regulated market in any member state
The de minimis threshold is low, at GBP 86,000 (for a single payment or series of related payments in a financial year).

The definition given to "Government" is wide and will catch all Government sub-divisions and entities, including state-owned entities such as national oil companies.

TAX

By Phil Norton

Acquiring a USD 313 million problem.

In Heritage Oil and Gas & Anor v Tullow Uganda Ltd the Court of Appeal upheld Tullow's right to be indemnified for a USD 313,447,500 payment it made to the Government of Uganda in connection with the acquisition of a petroleum exploration licence from Heritage. This recent decision provides a stark reminder of the need to ensure that close attention is paid to the drafting of tax clauses in a sale and purchase agreement.

The Ugandan revenue authority initially assessed Heritage for tax in respect of the proceeds of disposal of the licence. However, the burden was shifted on to Tullow because Heritage (a non-resident company) disputed liability. The difficulty for Tullow was that the Ugandan Government was not prepared to give its required consent for the transfer unless the tax liability was dealt with first.

Tullow entered into negotiations with the Ugandan Government and subsequently gave Heritage notice that it had received a tax demand from the Ugandan revenue authority, which it had agreed to pay.

Tullow made a claim under a clause of the sale and purchase agreement with Heritage (SPA), which broadly provided that transfer taxes were the responsibility of Heritage and that, in the event that it was charged to Tullow, Heritage would indemnify Tullow for the tax.

One of the key arguments put forward by Heritage was that Tullow had not given it notice of the tax claim within the time period specified in the SPA which, Heritage argued, was a condition precedent to Tullow's ability to claim under the indemnity. Notification had not been given by Tullow within the requisite period, so Heritage argued that Tullow's claim had to fail.

The Court did not accept that the requirement to give notice was a condition precedent, and was mindful that construing it as such would mean that the most trivial of breaches could deny a claim completely. Tullow's position was helped by the fact that a separate clause, dealing with time limits for making claims, was drafted in clear language that made it clear that making a claim within time was a condition precedent. The Court held that the notification requirement would have needed to have been similarly drafted, to make it clear that it was a condition precedent, if it was intended to operate in that way.

If the requirement to give notice had been a condition precedent preventing a claim, then Tullow's purchase price for the licence would effectively have increased by USD 313 million. On these sorts of numbers it may be worth reading the tax clauses in an agreement a little more closely.

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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