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 Topics
 
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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