This week:
- Companies House publishes an outline timetable for implementing reforms to UK company law
- The court substitutes an alternative interest rate for a reference to the now-discontinued USD LIBOR in the terms of preference shares
- The court interprets a material adverse effect condition in a share sale agreement, drawing some general observations
- The Institute of Directors publishes a new code of conduct for company directors
- The House of Lords publishes a review on the UK's Modern Slavery Act 2015, including on modern slavery statements
Companies House sets out plan for upcoming company law reforms
Companies House has published a policy paper setting out an outline transition plan for upcoming changes to UK company law.
The Economic Crime and Corporate Transparency Act 2023 received Royal Asset last year. Among other things, it amends UK company legislation to give Companies House more powers to challenge filings, query information, make corrections to the public register and bring enforcement action.
The Act also introduces new requirements for company directors and persons with significant control (PSCs) to undergo identity verification (IDV), as well as restricting who can file documents at Companies House to ID-verified individuals and authorised corporate service providers (ACSPs).
The paper confirms the following outline timetable for key developments. (The policy paper contains a more granular outline timetable.)
- Spring 2025. Firms regulated by anti-money laundering legislation should be able to register as an ACSP. Once registered, an ACSP will be able to file documents at Companies House and conduct IDV on individuals. Individuals should be able to undergo IDV on a voluntary basis.
- Summer 2025. Companies House should be able to allow access on request to certain trust information on the Register of Overseas Entities.
- Autumn 2025. Mandatory IDV requirements should be introduced for initial directors and PSCs of newly incorporated companies. For directors and PSCs of existing companies, there would be a 12-month transitional period, with IDV needing to be completed by the next confirmation statement.
- Spring 2026. New filing restrictions should come into effect requiring a person filing a document either to have completed IDV or be registered as an ACSP.
- By end of 2026. Changes to limited partnership law and reforms to create greater shareholder transparency should come into effect.
- Further into the future. Following an extensive formal notice period, all accounts will need to be delivered to Companies House via software. Companies House will announce the formal notice period as soon as it is able to do so.
The paper states that Companies House is unable to set a firm timetable for implementing all measures, as some require secondary legislation. It states that legislation will be commenced over 18 months with implementation activity and transitional periods continuing until 2027.
The paper also confirms that the forthcoming prohibition of corporate directors will be brought into force, although it gives no date for this. Under this reform, a UK company will not be permitted to have a corporate director unless that corporate director's own directors are all individuals who have completed IDV.
Read Companies House's policy paper and outline timetable on implementing company law reforms
Court substitutes alternative interest rate into terms of shares linked to LIBOR
The High Court has held that, when the terms of payment on preference shares became unworkable due to the cessation of LIBOR, payments would continue but would be referenced to the nearest equivalent rate.
Standard Chartered plc v Guaranty Nominees Ltd and ors [2024] EWHC 2605 (Comm) concerned the terms of preference shares issued by Standard Chartered (SC).
The terms of the preference shares required SC to pay a semi-annual dividend at a fixed rate for an initial period, then at a floating rate of "1.51% plus Three Month LIBOR".
SC's articles of association set out in detail how to calculate "Three Month LIBOR", providing a primary method of calculation, supplemented by a series of fallbacks should quotations for three-month USD LIBOR not be available.
In 2024, USD LIBOR ceased to be published in the UK.
The issue before the court was the impact of the withdrawal of USD LIBOR on the preference shares in circumstances where none of the agreed fallback methods was still available.
The court held that payments would continue to accrue on the preference shares but would be linked to a suitable alternative rate instead. In the circumstances, the court chose the Secured Overnight Funds Rate (SOFR) published by the Chicago Mercantile Exchange, supplemented by a fixed spread adjustment determined by the International Swaps and Derivatives Association (ISDA), a rate that had been endorsed by the US Federal Reserve System, the UK Financial Conduct Authority and the Bank of England.
To achieve this, the court implied a term into SC's articles that, if LIBOR were to cease to be available (as, in fact, happened), dividends would be calculated using a "reasonable alternative rate".
The case shows that, where contracts contain legacy references to LIBOR that no longer function, the courts will be ready to substitute an appropriate alternative, rather than allow the contract to fail.
Court analyses material adverse change condition in share sale agreement
The High Court has analysed a material adverse effect (MAE) clause in a share sale and purchase agreement (SPA), finding that it did not apply in the particular circumstances. Although fact-specific, the analysis is useful in understanding how the courts will approach MAE, or material adverse change (MAC), conditions.
What happened?
BM Brazil I FIPM v Sibanye BM Brazil (Pty) Ltd [2024] EWHC 2566 (Comm) concerned an SPA under which Sibanye would buy the shares in a Brazilian mining company from BM Brazil.
The SPA contained a MAE condition that allowed Sibanye to terminate the transaction if a "Material Adverse Effect" occurred on or before the date scheduled for completion.
"Material Adverse Effect" was defined in the SPA as "any change, event or effect that individually or in the aggregate is or would reasonably be expected to be material and adverse to the business, financial condition, results of operations, the properties, assets, liabilities or operations of the [company and its subsidiaries], taken as a whole..." (There was also a list of exceptions, which is not relevant here.)
A displacement in the mine (referred to as a "geotechnical event") occurred around two weeks after the SPA was signed. Some time later (indeed, after the original scheduled closing date), Sibanye informed BM Brazil that it was terminating the SPA on the basis that a MAE had occurred.
The dispute revolved around whether the geotechnical event amounted to a MAE.
What did the court say?
In short, the court found that, in the context of the target business and the transaction as a whole, the effects of the geotechnical event were not material and so did not constitute a MAE.
As with cases generally regarding MAEs and contractual interpretation, the decision is based on highly specific facts. But the court made some useful observations which are worth bearing in mind when drafting or seeking to rely on a MAE clause.
- A MAE condition must be read in the context of the contract as a whole, including any other risk allocation provisions.
- There is no special rule for interpreting MAE conditions. The courts will approach them as they approach any other contractual term (although any case law on MAEs may help in that exercise).
- The words "would reasonably be expected to be material and adverse" create an objective test. This is judged from the perspective of an objective and reasonable observer and not by reference to the parties' intentions or expectations when they sign the SPA.
- Whether an objective observer would regard a matter as "material and adverse" is a binary "yes/no" question. An occurrence is not a MAE merely because it falls within a range of hypothetical situations that could be regarded as material and adverse.
- The test is whether it is "more likely than not" that the matter would have a material and adverse impact on the target business.
- A MAE condition is generally forward-looking, referring to events that occur after signing but before completion. It does not cover matters that occur before signing but come to light as a result of some different event that occurs after signing (so-called "revelatory occurrences").
- Whether a matter is "material", including any quantification of its economic effect, must be judged at the time the MAE condition is activated.
- Although previous cases have distinguished between the "quantitative" and "qualitative" aspects of a MAE, the judge in this case found it difficult to see how a matter could be qualitatively material without also being quantitively material (and, conversely, how something that is quantitatively material cannot also be qualitatively material). In essence, the court disapproved of the distinction.
- There is no "bright line" for determining whether a matter is "material". The court will consider a number of things, including the size of the transaction and target business, the nature of the assets and business, and the length and complexity of the sale process.
What does this mean for me?
It is always important to bear in mind that decisions on terms such as MAEs/MACs are highly fact-specific. There is no guarantee a court will interpret a MAE in a different context in the same way.
In addition, although they often differ widely in their structure, MAE conditions often adopt similar concepts and language. As a result, the decision might not be expected to have a significant impact on the drafting of MAE clauses.
However, the judgment shows the need to identify carefully what range of circumstances the parties intend to take into account when creating a MAE condition. In particular, if parties know that certain matters are material to the target business, or that a certain level of economic impact will be substantial, there may be value in writing these matters or thresholds directly into the condition itself.
Institute of Directors publishes code of conduct for directors
The Institute of Directors (IoD) has published a new Code of Conduct for directors of companies.
The publication of the Code follows a public consultation by the IoD in June 2024.
The Code is designed as a practical tool to help directors of all kinds of company (including not-for-profit companies) fulfil their responsibilities and make better decisions. It is voluntary, with directors signing up to it to show their willingness to apply high ethical and behavioural standards.
The Code is structured around six "Principles of Director Conduct", namely leading by example, integrity, transparency, accountability, fairness and responsible business. Each of the Principles is in turn underpinned by "Undertakings" specific to that Principle.
The IoD encourages boards to commit publicly to the Code, including through disclosure in their annual report and/or on their website.
Access the Institute of Directors' new Code of Conduct for Directors (opens PDF)
House of Lords publishes review of modern slavery reporting
The House of Lords Modern Slavery Act 2015 Committee has published a report on the Modern Slavery Act 2015, the UK's core legislation that attempts to address slavery, human trafficking and other modern slavery activities.
Section 54 of the Act requires commercial organisations that supply goods or services in the UK and that have turnover above a specific threshold to publish an annual slavery and human trafficking statement (more commonly referred to as a "modern slavery statement") setting out the steps they took during the year to eliminate modern slavery from their organisation and supply chains.
However, there is no prescribed content for the statement (although the legislation and Home Office provide guidance on areas the statement can cover) and no deadline for publishing it. Organisations can upload their statement to a central government registry, but, again, this is not mandatory.
Previous government administrations have signalled an intention to introduce mandatory content for modern slavery statements and to introduce enforceable penalties for failure to publish. However, these have not been brought forward as legislation.
The review notes that, in 2015, the requirements in section 54 were "considered world leading", but that, since then, "several countries have gone beyond", including by introducing mandatory supply chain due diligence requirements.
The Committee recommends making it mandatory for organisations to publish their modern slavery statement in the central government registry, with the statement including prescribed information (such as a description of how the organisation has assessed the effectiveness of its actions).
It also recommends introducing proportionate sanctions for non-compliance with supply chain requirements.
Most significantly, the Committee recommends introducing mandatory supply chain due diligence for organisations within the scope of modern slavery reporting (a requirement that has been implemented in various other jurisdictions but not the UK).
The Committee's report is purely advisory. We await the Government's response, including whether it takes any steps to modify the current regime in the Modern Slavery Act 2015.
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.
