United States: UK Corporate Update 18 Nov 2013

This corporate update gives an overview of recent rule changes in respect of director remuneration and summarises recent decisions relating to good faith obligations, MAC provisions and unjust enrichment.

DIRECTORS' REMUNERATION: NEW RULES FOR QUOTED COMPANIES

On 1 October 2013 significant changes were introduced to the rules relating to the remuneration of directors of UK "quoted companies" (i.e., companies whose shares are listed on the Main Market in London or in another EEA State, or on the New York Stock Exchange or Nasdaq) by the Enterprise and Regulatory Reform Act 2013.

The changes, which apply to financial years ending on or after 30 September 2013, include:

  • a requirement for the directors' remuneration report (which forms part of the company's annual report and accounts) to contain a separate "forward looking" remuneration policy section (including a statement on how the company intends to implement its approved remuneration policy in the following financial year);
  • a new requirement for a binding shareholder vote on the company's directors' remuneration policy at least every three years - the non-policy part of the remuneration report remains, as previously, subject to an annual advisory vote; and
  • new restrictions on payments to directors for loss of office – essentially, these prohibit companies from making any such payments that are inconsistent with the company's most recently approved directors' remuneration policy.

The Large and Medium-sized Companies and Groups (Account and Reports) (Amendment) Regulations 2013 (SI 2013/1981) also came into force on 1 October 2013. They apply to the same companies as those affected by the above remuneration rules, and apply to financial years ending on or after 30 September 2013. They set out the information to be given in the directors' remuneration report. This must comprise a remuneration policy report and an implementation report. In particular, the Regulations provide for disclosure of the total amount paid to each director as a single figure, taking account of all elements of remuneration. In addition, companies must explain the basis for decisions made on the level of variable pay and how the various elements of a director's remuneration support the company's short and long-term strategies.

Separately, GC100 and the Investor Group (comprising, respectively, representatives of general counsel and company secretaries of companies in the FTSE100 and leading UK institutional investors who arecommitted to best practice principles of governance and stewardship) have published guidance on the new rules. In addition to advice on the new rules, it provides guidance on how to promote an effective relationship between companies and investors in relation to remuneration. A key area of focus in this regard is the remuneration committee's use of discretion and judgement. The guidance also addresses how companies should deal with the situation where there is a lack of shareholder support for the annual remuneration report. The guidance suggests that in that situation, companies should consider the number of votes withheld, as well as those cast against the resolution, and should identify a level of support (which may be as low as twenty per cent.) which would cause them to explain the level of support to their shareholders.

CONTRACTUAL INTERPRETATION: DUTY OF GOOD FAITH

With the exception of certain specific types of contract (such as partnership agreements or employment contracts) the English courts have historically been unwilling to imply a duty of good faith into commercial contracts.

Decisions

In the recent case of Yam-Seng v. International Trade Corporation, a duty to act in good faith was implied into a distribution agreement on the basis that this reflected the presumed intention of the parties. However, that decision has not been followed in two more recent cases.

First, in Mid Essex Hospital Services v. Compass Group, which was reported in our June 2013 UK Corporate Update, the Court of Appeal found that a duty to co-operate in good faith arising in relation to the contract was limited to certain specific obligations and that it did not extend to the parties' conduct more generally.

The issue has now been considered again in TSG Building Services v South Anglia Housing. In 2009 TSG entered into a four year contract with South Anglia to supply gas servicing and related services to 5,500 properties. The agreement allowed either party to terminate the contract on three months' notice without cause. South Anglia terminated the contract. In the arbitration proceedings which followed, TSG claimed damages for losses arising as a result of the termination. Two of the grounds raised by TSG were that:

  • termination constituted a breach by South Anglia of its obligation under the agreement to "...work together and individually in a spirit of trust, fairness and mutual co-operation within the scope of their agreed roles, expertise and responsibilities" and to "....act reasonably and without delay"; and
  • that an obligation of good faith should be implied into the agreement so as to limit South Anglia's right to terminate without cause to circumstances where it was acting in good faith in terminating the contract.

TSG's claims under these grounds were rejected by the Court. It found that the requirement to work together in the spirit of trust, fairness and co-operation applied only to the provision of the relevant services. The fact that the parties had expressly limited those obligations to their respective roles, expertise and responsibilities meant that they did not apply to the right to terminate the contract itself.

The more significant issue was whether a duty of good faith should be implied into the contract. The Court declined to do so. As the agreement set out how the parties intended to work together the Courtwould not imply any additional obligations. It added that, even if it had been possible to imply a duty of good faith, it would not affect the right to terminate the contract without cause, to which the parties had agreed expressly. The Court referred to the decision in Yam-Seng but held that the principles discussed in that case (of honesty and fidelity) were not relevant because there was no suggestion of dishonesty in relation to South Anglia's termination of the contract, and that the issue of fidelity was already covered by the express terms of the agreement.

Comment

The TSG case demonstrates that the normal principle of contractual interpretation, namely that a contract means what it says on its face (or what a reasonable person would understand it to say), continues to apply and that a general duty of good faith will not ordinarily be implied. However the Yam-Seng case shows that in some types of relational contract (e.g. agency, distribution, partnership or joint venture agreements), or where there is a suggestion of dishonesty or lack of fidelity, the courts may be more open to imply a duty of good faith.

CONTRACTUAL INTERPRETATION: MAC CLAUSES

There is relatively little case law in the UK on the interpretation of material adverse change (or "MAC") clauses. However, a recent case, Grupo Hotelero Urvasco S.A. v Carey Added Value SL, gives some indication as to the courts' approach in this regard.

Facts

The case concerned the development of a property in London by Urvasco Limited ("Urvasco"). Urvasco was an English subsidiary of a Spanish hotel group, Grupo Hotelero Urvasco S.A. ("GHU"). Funding for the project was provided by BBVA. In 2007, additional funding was required. GHU entered into a loan agreement with Carey Added Value SL ("Carey"), a Spanish real estate fund.

In 2008, Carey stopped providing funding. GHU brought a claim against Carey for breach of contract. Carey counterclaimed for repayment of sums advanced under the loan agreement, arguing that an event of default had occurred under the loan agreement as a result of which it was no longer required to lend. The loan agreement contained a MAC clause. The clause was formulated as a representation that there had been no material adverse change in the financial condition of GHU and Urvasco since a given date. As is usual in such agreements, the representation was stated to have been repeated at the date of each drawdown by reference to the circumstances existing at that date. Under the terms of the agreement, an untrue representation by GHU constituted an event of default.

The loan agreement with BBVA contained a similar MAC clause. The agreement deemed an event of default to occur if either GHU or Urvasco negotiated with creditors to re-schedule its indebtedness.

Carey claimed that an event of default had occurred under the loan agreement. Carey argued that the expression "financial condition" should be interpreted broadly to cover not just matters which affected the company's financial statements but also its prospects and general economic or market changes. On this basis, it argued that a MAC must have occurred by June 2008 in light of the then current state of the Spanish property market and economy more generally.

GHU argued that "financial condition" should be interpreted more narrowly, focusing on changes which have affected the company's financial statements, and, in particular, its balance sheet. Decision

The Court held that the MAC clause should be interpreted in accordance with normal principles of English law. This requires effect to be given to the agreement of the parties as it appears in the contract, either by applying the unambiguous words of the contract, or, where ambiguity exists, by applying a test of reasonableness. On this basis, the Court held that:

  • while an assessment of the company's "financial condition" for this purpose should focus on the impact of the relevant events on the company's financial statements, other "compelling evidence", such as a company ceasing to pay bank debts, could also be relevant. The Court determined that "financial condition" did not extend to a company's prospects or general economic or market changes;
  • a change in a company's financial condition is only materially adverse if it significantly affects its ability to perform its obligations;
  • in order for a change to be material, it cannot be temporary; and
  • a lender cannot invoke a MAC clause on the basis of circumstances of which it was aware at the time the agreement was signed, or by reference to a state of affairs which are likely to occur when the agreement was entered into.

Applying these principles the Court concluded that Carey had not shown that there had been a MAC in relation to GHU or Urvasco.

Comment

This case provides useful guidance on the interpretation of MAC clauses under English law, and, specifically, on the meaning of "financial condition" in this context. Although the case related to a loan agreement it seems likely that the principles articulated by the Court would be applied more widely, including to share and asset acquisition agreements. The court will consider the terms of the MAC and give effect to them – so the drafting of the MAC will be the key determinant of the protection it provides.

VALUATION IN CASES OF UNJUST ENRICHMENT

The UK Supreme Court has recently ruled on the principles to be applied when assessing cases of unjust enrichment and determining the value of services provided by one person to another where there is no contract between the parties.

Background

In Benedetti v. Sawiris, the dispute related to services provided by Mr. Benedetti in facilitating a corporate transaction. In 2002, Mr. Benedetti ("B") introduced the opportunity to acquire Wind, an Italian energy company ("W"), to Mr. Sawiris ("S"). A company controlled by B ("ITM") was subsequently appointed by a W subsidiary ("W sub") to provide W sub with brokerage services for €87 million in return for finding third-party investors. In the end, neither party was able to find third-party investors to participate and the agreement was abandoned. Ultimately S, together with family and associates, funded the acquisition of W through a separate acquisition agreement. B continued to be involved in negotiations, even though there was no contract between him and S and, following his appointment to the board of W sub, B procured W sub to enter into a brokerage agreement with ITM. At closing, ITM claimed €87 million. S complained, and B agreed to reduce this to €67 million, which S paid. In addition, B/ITM claimed remuneration for brokerage services. S offered €75.1 million (initially believing that the €67 million already paid was to reimburse B/ITM for expenses), but S subsequently refused to pay any further amount.

In the High Court, B brought a number of claims. He was successful in his claim that S had been unjustly enriched; that is to say, that S and W had received a benefit from B by way of the provision of services for which he had not been paid, and that compensation should be awarded on a "quantum meruit" basis (i.e., an amount which B deserved for the services he had provided). Even though the court found that the market value of the services provided by B/ITM was €36.3 million, he was held to be entitled to €75.1 million because this was the amount S had been prepared to pay.

On appeal by S to the Court of Appeal, B claimed that more than €75.1 million was due because of the value of the brokerage services provided. S argued that nothing was due and even if something was due on a quantum meruit basis, the amount should be less than the €75.1 million awarded by the High Court. The Court of Appeal held that B was entitled to restitution on a quantum meruit basis, but on the basis of market value of the services (i.e., the €36.3 million). Further, the Court of Appeal determined that €21.78 million of the €67 million of "expenses" received by B/ITM was, in fact, payment for the brokerage services and therefore held that the outstanding amount due from S to B was €14.25 million.

Decision

Both parties appealed and the Supreme Court overruled the previous decisions, finding in favour of S.

The correct approach to establishing the amount of a quantum meruit payment in the absence of a valid contract between the parties is to consider whether the defendant has been unjustly enriched and, if so, to what extent. Where a restitutionary award is to be made on the basis that there has been unjust enrichment, it is then calculated as the objective value of the benefit received by the defendant from the claimant – i.e., the price which a reasonable person would have to pay. Where the benefit takes the form of services, the value is normally the market value of the services performed, in this case €36.3 million.

The Supreme Court then considered two further issues:

  • Could the award be reduced below market value to reflect the actual value of services to the defendant (the "subjective devaluation basis")?
  • Could the award be increased, and the defendant required to pay more than market value if the defendant himself had valued the services at more than market value (i.e., here, €75.1 million rather than €36.3 million) (the "subjective revaluation basis")?

The majority of the Supreme Court agreed that the principle of subjective devaluation is permissible, so that the amount awarded to a claimant could be reduced to reflect the subjective value of the services to the defendant.

However, the main point in the case was whether B's claim for subjective revaluation could succeed. This would require a defendant to pay more than market value to the claimant where it is shown that the defendant subjectively valued the claimant's services at more than market value. The Supreme Court decided that this principle should not be permitted, as willingness to pay more than market value is irrelevant, unless it is a contractual obligation (although one dissenting judge said it might be possible in exceptional circumstances, which he did not outline). On the facts, the Supreme Court held that, even if the principle of subject revaluation were to be recognised, the evidence that S valued the services at €75.1 million fell far short of what would be needed to establish that he valued services at more than market value. Also, as B had personally received all of €67 million paid to ITM at closing, B had already received more than market value for his services and had no further claim for unjust enrichment/restitution

Comment

This is a rare case on the law of unjust enrichment and the concepts of subjective devaluation/revaluation, and it helpfully examines these concepts, about which there has previously been much academic writing, but little judicial authority.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions