Corporate Law Update
- New rules make it easier for directors to remove their residential addresses from public view
- PERG publishes its 2018 guidance on reporting by private equity-owned portfolio companies
- The Government consults on reforms to limited partnership law
- The London Stock Exchange consults on changes to the AIM Rules for Nominated Advisers
- The European Commission proposes new rules for cross-border divisions and migrations, and enhanced protections for creditors, employees and shareholders on cross-border mergers
- A company that set up a rival business was in breach of an express contractual duty of good faith
In March, we reported that the Government was planning to enact new rules to allow directors to remove their residential addresses from the public register at Companies House.
The new rules allow directors, secretaries, persons with significant control (PSCs) and LLP members to apply to remove their residential address for a fee of £55 per document.
The new rules will primarily affect directors, secretaries and LLP members appointed before 2009 (the point from which Companies House began systematically to suppress new residential address information).
The Private Equity Reporting Group (PERG) has published the 2018 version of its guidance on good practice reporting by private equity portfolio companies (also known as the “Walker Guidelines”). The purpose of the guidance is to assist private equity-owned portfolio companies with improving transparency and disclosure in their financial and narrative reporting.
The 2018 version is substantially the same as the previous guidance from 2017, although some of the practical examples in the guidance have been updated.
The Government is consulting on reforms to limited partnerships (“LPs”) in the UK. The report stems from concerns that LPs might be being misused, particularly for money laundering.
The consultation follows the Government’s call for evidence on the subject in January 2017.
LPs are popular vehicles for private equity, venture capital, investment and real estate funds. In Scotland, LPs have also been used historically by the agricultural community. Scottish LPs are also sometimes used in certain pension scheme investments.
Unlike companies, LPs in England, Wales and Northern Ireland are not separate bodies corporate and do not have legal personality. By contrast, Scottish LPs do have separate legal personality (although they are not bodies corporate).
The Government is proposing the following changes:
- Registration. A person would be able to present an application to register an LP only if they are supervised under money laundering regulations. This would limit the ability to make applications to formation agents, including law and accountancy firms.
Currently, anybody can apply to Companies House to register an LP. However, the Government notes that fewer than 20 limited partnerships in the last five years were registered “directly”, rather than by a formation agent. In reality, therefore, this is unlikely to hinder legitimate registrations. The main purpose of the reform would be to check the formation agent’s credentials.
- Principal place of business. An LP must have a principal place of business (“PPoB”). On registration, the LP must specify an address in the UK as its PPoB, but there is nothing to stop an LP moving its PPoB abroad once it has been registered.
The Government is proposing to require LPs to keep their PPoB in the UK (option A), or to provide a service address in the UK if they move their PPoB abroad (option B). In each case, the address would be confirmed annually by a confirmation statement and supporting evidence.
The first option may impact on private equity and venture capital funds. Some funds move their PPoBs outside the European Economic Area (EEA) so that they can be managed from outside the EEA for the purposes of the EU Alternative Investment Fund Managers Directive (AIFMD).
If the Government implements option A, the regulatory analysis underpinning the operation of these funds will be called into question and, as a result, they may need to be restructured.
- Annual confirmation. Every LP would have to file an annual confirmation statement confirming that its information on the public register is correct. Although companies must file confirmation statements, there is currently no such requirement for LPs. The statement would cover the LP’s partners, the amounts they have contributed to the LP, and the LP’s PPoB.
- Accounts. The Government is also asking for views on whether LPs should be required to prepare accounts and file them at Companies House.
Currently, an LP is required to prepare accounts only if each of its general partners is either a limited company, or an unlimited company whose members are all limited companies. In practice, it is possible to maintain a shield of limited liability but avoid the requirement to prepare accounts by installing a limited liability partnership (LLP) as the LP’s general partner.
However, this would change if the Government requires all LPs to prepare accounts. Such a change may well remove one of the key advantages of choosing an LP over other structures and might encourage fund managers to start using non-UK vehicles (such as Luxembourg LPs) for their fund structures.
- Striking-off. Finally, Companies House would be able to strike LPs off the register where they fail to deliver the proposed confirmation statement. This would mirror Companies House’s compulsory striking-off powers for companies.
The consultation does not contain any proposals to give legal personality to English LPs.
The Government has requested responses by 23 July 2018.
The London Stock Exchange (the “Exchange”) has issued AIM Notice 51, in which it is consulting on proposed amendments to the AIM Rules for Nominated Advisers (or nomads).
The proposed changes include the following:
- Firms wishing to become or continue to serve as a nomad would need to satisfy new, additional eligibility criteria. These include demonstrating “appropriate financial and non-financial resources” and “adequate risk management systems”.
- The Exchange would be able to refuse approval to a prospective nomad if it feels the applicant (or any of its shareholders or officers) might be detrimental to the reputation or integrity of AIM. This could be the case even if the applicant satisfies all of the other eligibility criteria.
- The rules would clarify which events a nomad is required to report to the Exchange. These would now include the commencement of any investigation or disciplinary proceedings relating to the nomad or its employees.
- A new rule would allow the Exchange to take steps to address poor nomad performance, including requiring remedial action, imposing restrictions or limitations on nomad services, and suspending individual employees’ approvals.
The Exchange has asked for comments by 25 May 2018.
The European Commission has announced that it is proposing new rules to make it easier for companies within the European Union (EU) to merge or divide, or to move from one EU Member State to another. It has also published a draft amending Directive.
The existing cross-border mergers regime allows two or more companies from different EU Member States to merge by following a prescribed process.
However, the regime does not work in the other direction so as to allow a single company to divide or demerge two or more existing businesses. Instead, a company needs to implement one of various structures in order to demerge an existing business into a new company, which will vary by country.
In addition, it is not currently possible for a company to move, or migrate, from one EU Member State to another unless the law of each individual state allows this or the company takes the form of a European company (SE).
It is possible, to some extent, to achieve a migration artificially using the cross-border merger regime, or by inserting a new holding company in the destination country. However, in both cases this involves creating a brand-new company, rather than retaining an existing company and simply shifting its territory of registration.
The Commission’s proposals would create a simple procedure for cross-border divisions and migrations. They would also amend the existing cross-border mergers regime to enhance protections for creditors, employees and existing shareholders. In particular, shareholders who do not agree to a merger, migration or division would be offered the right to exit the company.
As with all new EU legislation in the lead-up to Brexit, it is not yet clear to what extent these proposals would (or could) be implemented into UK law. This will depend on the final agreement between the EU and the UK on the UK’s withdrawal.
In Health & Care Management Ltd v The Physiotherapy Network Ltd, the High Court held that a company that used another company’s data to set up a rival was in breach of a contractual duty of good faith.
HCML and TPN had entered into a referral agreement, under which HCML promised (among other things) to “act in good faith to TPN at all times”. HCML subsequently set up a rival business, used TPN’s database (which included contacts and pricing structures), diverted referrals away from TPN and misled TPN about the market for the rival business.
The judge found that HCML had breached the contractual duty of good faith. Indeed, it said that the act of covertly setting up a rival business was probably itself enough to amount to a breach.