Included in the June edition of Corporate News: Law Society guidance – whether intragroup guarantees can amount to a distribution; ACCA new report investigates corporate governance; European Commission EU state aid approval granted for EMI plans and more.
Law Society guidance – whether intragroup guarantees can amount to a distribution
The ICAEW previously issued guidance to the effect that a distribution can arise from a subsidiary guaranteeing a liability of its parent or fellow subsidiary if the subsidiary does not receive a fee at market rates in consideration. The Law Society has now released its response stating that, in its opinion, a guarantee given in relation to a 'normal financing transaction' does not constitute a distribution, whether or not a fee is payable. A 'normal financing transaction' is expressed to be one in which, at the time the guarantee is given, the board of directors of the guarantor properly considers the financial position of the member of the group to whom the credit is provided and concludes, in good faith and on reasonable grounds, that it is likely to be able to repay or refinance the credit when due and therefore that a claim is unlikely to be made on the guarantee. In doing so, the Law Society notes that, following case law, one must look at the substance of the transaction rather than the outward appearance such that there may be a distribution where: (i) the intention is that the guarantee will be called (or, viewed objectively, that is likely); and (ii) the subsidiary does not receive appropriate value for assuming that contingent liability. Whether entering into a guarantee constitutes a distribution must be tested at the time it is entered into. If it is not a distribution when entered into, it will not be a distribution should it later be called.
The Law Society has also published its view on the following: If an English company, which is a member of a group of companies, makes an on-demand loan to its parent company or to a fellow subsidiary, can that loan constitute a distribution of assets to its members? The Law Society's view is that a normal on-demand intra-group loan, whether interest bearing or not, is not a distribution - again where, at the time the loan is made, the board of directors of the guarantor properly considers the borrower's financial position and concludes, in good faith and on reasonable grounds, that it is likely to be able to repay the loan when repayment is demanded.
Revised notification thresholds for mergers in certain 'national security sectors' confirmed
The government has confirmed amendments to the UK merger control thresholds for mergers in sectors impacting national security, namely:
- military or dual-use goods which are subject to export control;
- quantum technology; and
- computing processing units.
Drafts of the two statutory instruments were published in March 2018:
- The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018
- The Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018
For these sectors only, the 25% "share of supply" threshold is amended so that it can be met solely by the activities of the target and the alternative "target turnover" threshold is reduced to £1m (from £70m).
The purpose of these amendments is to allow the UK government to intervene in smaller mergers in these sectors which might give rise to national security implications.
The revised thresholds come into force on 11 June 2018. There are no changes to the thresholds for mergers in other industry sectors.
BEIS updates paper on the state of UK business incubators and accelerators
The Department of Business, Energy and Industrial Strategy (BEIS) has updated its 2017 research paper to include an updated directory of UK business incubators and accelerators. The report, initially published in April 2017, explores the scale and distribution of incubators and accelerators, both geographically and sectorally.
Key findings in the report include:
- there are currently 205 incubators, 163 accelerators, 11 pre-accelerators, seven virtual accelerators and four virtual incubators active in the UK;
- while all incubators provide businesses with office or work space, accelerator programmes place more emphasis on direct funding, with the majority offering some form of financial support; and
- the majority of accelerators and incubators have either a broad focus on digital technology or no sectoral preference. Where a sectoral preference exists, incubators are much more likely to focus on businesses active in science-based areas, such as health and life sciences, than accelerators.
ACCA new report investigates corporate governance
The Association of Chartered Certified Accountants (ACCA) has published a report: "Tenets of good corporate governance". The report sets out key issues for companies to think about when considering their long-term business model and strategy. It identifies five themes that are recurring in the corporate governance debate:
- the relationship between companies and society;
- diversity and balance;
- enabling an effective board;
- executive remuneration; and
- gatekeepers of corporate governance.
HMRC updates guidance on criminal facilitation of tax evasion
HM Revenue and Customs (HMRC) has updated its guidance on failure to prevent criminal facilitation of tax evasion to include information about self-reporting a company or partnership that has facilitated criminal tax evasion.
The guidance has been produced to help business understand the offences and take a more effective approach to mitigating the risk of a business failing to prevent its representatives from criminally facilitating tax evasion.
European Commission EU state aid approval granted for EMI plans
Further to the issue of the tax treatment of enterprise management incentives (EMI) plans trailed in our May edition of Corporate News, it is now clear that EMI options granted prior to 7 April 2018 and after 15 May 2018 will, subject to the usual requirements, qualify to be tax-advantaged EMI options. However, it remains unclear whether the state aid approval will be back-dated to 7 April in order to ensure that EMI options granted in the period from 7 April 2018 to 15 May 2018 will also qualify for EMI tax treatment. We are awaiting confirmation on this point from HMRC/HM Treasury. However, the European Commission has stated that the approval expires on 6 April 2023, which would strongly suggest that the approval commenced on 6 April 2018 (as it is normally valid for 5 years).
It is also unclear whether the European Commission required any variations to the EMI regime as part of the approval process. Again, we are waiting for confirmation on this from HMRC/HM Treasury.
In respect of the status of EMI plans post-Brexit, it is expected that the latest European Commission decision will automatically become UK domestic law under the European Union (Withdrawal) Bill.
Corporate Governance Reform
House of Commons briefing paper confirms certain corporate governance reforms likely to apply from January 2019, not June 2018
The government's response to its Green Paper published in August 2017 outlined various corporate governance reforms including the introduction of secondary legislation which would require quoted companies to:
- report annually in their remuneration report on the ratio of CEO pay to the average pay of their UK workforce; and
- provide a clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes.
That legislation would also require public and private companies of a significant size to explain how their directors comply with the requirements of s.172 Companies Act 2006 to have regard to employee and other interests and, to the extent not already required to do so, disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal code of governance.
It was originally envisaged that draft secondary legislation would be consulted on in March 2018 with a view to it coming into force in June 2018. The government has now indicated that it is more likely that the reforms will apply to financial years beginning on or after 1 January 2019 which should coincide with implementation of the revised UK Corporate Governance Code. No publication date for the legislation has been indicated. The Financial Reporting Council (FRC) is due to publish the revised UK Corporate Governance Code later this summer.
Government launches review of the FRC
The independent review of the FRC has launched a call for evidence, seeking evidence from stakeholders on topics such as:
- the FRC's role and purpose;
- its effectiveness and its powers;
- its potential role in preventing corporate failure;
- its legal status and relationship with the government;
- its governance and leadership;
- its funding, resources and staffing; and
- its role in reducing major corporate failure risk.
The review will also examine:
- whether or not the FRC is, as was charged in the recent Select Committee report on Carillion, 'chronically passive', 'timid' and requiring culture change;
- whether or not it is too slow, insufficiently proactive and whether its actions have sufficient deterrent effect; and
- whether or not it is too close to, or unwilling sufficiently to challenge, the 'big 4' audit firms.
Responses are required on or before 6 August 2018.
Can you orally amend a written agreement with a 'no oral modification' clause?
Our commercial team have published an article on the eagerly awaited decision in Rock Advertising v MWB Business Exchange 2018 UKSC 24 which now provides some clarity on the use of 'no oral modification' (NOM) clauses.
An alterations / variations clause is commonly included in a contract to provide certainty between the parties as to what has been agreed and flexibility to vary that agreement provided the formalities set out in the agreement are complied with. More often than not this will require alterations to be in writing (a NOM clause). The effectiveness of NOM clauses was put in doubt by a number of cases including the Court of Appeal decision in this case - therefore the Supreme Court decision provides some welcome clarity. That said, it also underlines the importance of post execution contract management which, for some, is more easily said than done.