Embed Size (px)
Citation preview
Note from the Editor In this edition of our Corporate Briefing we focus on: (i) recent new guidance for non‑executive directors, which is essential reading for all existing and prospective non‑executive directors; (ii) the impending launch of the new high growth segment of the London Stock Exchange (LSE) which will provide new opportunities for growth and capital raising for fast growing European businesses; and (iii) two separate cases, arising from claims for breach of the terms of share purchase agreements, which reinforce the Courts’ reluctance to interfere with the terms agreed between commercial parties, particularly where there is equal bargaining power. We have also included brief updates on changes to the Companies House registration of charges regime which take effect on 6 April 2013 and proposals to modify the share buy‑back regime under the Companies Act 2006 (CA 2006), expected to come into force on 30 April 2013. A separate major development of note, not covered here in detail, is the coming into force of the new UK financial services regulatory structure on 1 April 2013, established under the Financial Services Act 2012 (which received Royal Assent in December 2012) and related secondary legislation. On 1 April, the Financial Services Authority (FSA) will be abolished and the majority of its functions transferred to two new regulators, the Prudential Regulation Authority and the Financial Conduct Authority (FCA). The FCA will inherit the majority of the FSA’s existing roles and functions and will adopt the legal corporate identity of the FSA; in this regard, it will largely inherit the FSA’s market conduct regulatory functions and will retain the FSA’s current function as the UK Listing Authority. In particular, the FCA will be responsible for reviewing and approving prospectuses and circulars, determining eligibility for listing, maintaining the Official List, regulating exchanges and other trading platform providers and exercising civil and criminal powers in relation to market abuse and insider dealing. Nick Fothergill Partner, London Corporate Group
wfw.com
UK: Corporate Briefing March 2013
Contents Note from the Editor 01Non‑executive directors ‑ recent ICSA guidance on liability
02
New London Stock Exchange high growth segment
03
Changes to the UK security registration regime
04
Changes to share buy‑backs 04Cases 05Contacts 07
02 03 UK: CORPORATE BRIEFING UK: CORPORATE BRIEFING
Non‑executive directors – recent ICSA guidance on liability In January 2013, the Institute of Chartered Secretaries and Administrators (ICSA) issued a new guidance on the liability of non‑executive directors. As stated in the guidance, it is important for all non‑executive directors (or potential non‑executive directors) to think carefully about the steps they should and might take to ensure not only that they are effective in their role, but that they are also not exposing themselves to liability – from penalties to disqualification and imprisonment – through doing the wrong things or not doing the right things. The guidance suggests ways in which non‑executive directors can approach their work in order to be able to demonstrate to a regulator, or in a court of law, that they had taken appropriate steps to exercise care, skill and diligence (a key statutory duty owed by a director to the company) in the execution of their roles and responsibilities. Importantly, non‑executive directors need to fully understand the time commitment necessary to fulfil the expectations of the role, which may be significant (especially when the company is undergoing a period of particularly increased activity or crisis). In addition to appending certain elements of the UK Corporate Governance Code that describe the role and responsibilities of a non‑executive director, the guidance sets out best practice (i) before joining a board and (ii) on appointment to a board. Before joining a board Prior to joining a board, prospective non‑executive directors should:
undertake their own due diligence of the company to ensure they have confidence in the company and can make a strong contribution to it; understand that more is expected from a director with specific skills and ensure that they spend time developing and refreshing those skills; recognise that part of their role is to uphold high standards of integrity and, together with the chairman and executive directors, to instil the appropriate culture and values in the boardroom and the company; review the letter of appointment (which should state the minimum time commitment expected to fulfil the role and the possibility of additional time commitments) and raise any concerns before signing; and understand their duties regarding conflicts of interest, gifts and hospitality as set out in the CA 2006 and to declare any potential or actual conflicts of interest.
On appointment to a board Newly‑appointed non‑executive directors should:
receive a comprehensive induction programme and have personal input into their training which should be tailored to their needs; understand that their role is to provide independence, oversight and constructive challenge to the board and to contribute to the development of strategy using their experience and expertise; ensure that they receive a schedule of future board and committee meetings in advance so that they have the opportunity to attend; insist on receiving accurate, comprehensive and up‑to‑date information in advance of meetings and any other important information that arises between meetings; discuss any concerns with the company’s executives and speak to the company’s advisers (such as the external auditor) or take independent professional advice at the company’s expense if they consider it necessary; ensure that they make all decisions objectively in the interests of the company; familiarise themselves with company procedures for dealing with conflicts of
interest or gifts and hospitality; and appreciate that circumstances may arise such that they may need to consider resigning from a board.
Case involving failure by non‑executive directors In the recent case of Newcastle International Airport Ltd (NIA) v Eversheds LLP, which concerned a dispute over new service contracts drafted by solicitors which gave the executive directors significant bonuses as part of a refinancing deal, the Court found that the loss suffered by the company was because its non‑executive directors failed to carry out their obligations to the company in relation to the contracts. The company determined its executive pay through a remuneration committee comprised only of non‑executive directors and that committee failed to follow proper procedures for fixing the remuneration packages. It was clear that there had been poor consideration and understanding of the proposal papers, the external legal advice and the detail of the legal contracts, and there was poor communication between members of the committee. In particular, the chair of the board and the remuneration committee was criticised for her lack of understanding of the role of chair of the remuneration committee and its significance – an important part of the role was to ensure that the new contractual provisions were subject to independent scrutiny by the remuneration committee. Aside from being a useful reminder of the duties of non‑executive directors and remuneration committee members, the case illustrates the Courts’ willingness to scrutinise the actions of non‑executive directors and lay responsibility at their door. Taking the time to read and take note of the ICSA guidance should help to avoid such situations. The new ICSA guidance will be of particular interest to those advising existing and prospective non‑executive directors and for larger companies who have, or may be looking to appoint, non‑executive directors, who may wish to ensure that all such directors receive copies of the guidance. Company secretaries (and other board members) will also be well advised to ensure they are familiar with the guidance and what is expected of non‑executive directors and their role in facilitating this. As the guidance makes clear, the role of non‑executive director brings with it duties and obligations and it is in the interests of all concerned to get the selection process and outcome right when filling non‑executive roles and to provide the ongoing training and support required to enable non‑executives in turn to fulfil their duty to support, supervise and scrutinise the business. For a copy of the ICSA guidance, click here. New London Stock Exchange high growth segment In our last Briefing we reported that the Department for Business, Innovation and Skills (BIS) had developed a set of proposals with the LSE to attract entrepreneurs and high‑growth companies to the UK. These are intended to make the UK an attractive and competitive listing destination for high‑growth businesses and provide greater choice for companies seeking capital and investors seeking growth opportunities. In February 2013, the LSE published a draft rule book for the new high growth segment of the Main Market (HGS), the Main Market being the LSE’s principal market for UK and overseas companies. The new segment is expected to launch in March 2013 and is intended for those companies that would like to be admitted to the Official List but have not yet met the eligibility criteria. It is seen as a stepping stone to a full listing on the Official List.
Watson, Farley & Williams March 2013
“Importantly, non‑executive directors need to fully understand the time commitment necessary to fulfil the expectations of the role, which may be significant...”
“Aside from being a useful reminder of the duties of non‑executive directors and remuneration committee members, the case illustrates the Courts’ willingness to scrutinise the actions of non‑executive directors and lay responsibility at their door.”
>
>
>
>
>
>
>
>
>
>
>>
>
02 03 UK: CORPORATE BRIEFING UK: CORPORATE BRIEFING
Non‑executive directors – recent ICSA guidance on liability In January 2013, the Institute of Chartered Secretaries and Administrators (ICSA) issued a new guidance on the liability of non‑executive directors. As stated in the guidance, it is important for all non‑executive directors (or potential non‑executive directors) to think carefully about the steps they should and might take to ensure not only that they are effective in their role, but that they are also not exposing themselves to liability – from penalties to disqualification and imprisonment – through doing the wrong things or not doing the right things. The guidance suggests ways in which non‑executive directors can approach their work in order to be able to demonstrate to a regulator, or in a court of law, that they had taken appropriate steps to exercise care, skill and diligence (a key statutory duty owed by a director to the company) in the execution of their roles and responsibilities. Importantly, non‑executive directors need to fully understand the time commitment necessary to fulfil the expectations of the role, which may be significant (especially when the company is undergoing a period of particularly increased activity or crisis). In addition to appending certain elements of the UK Corporate Governance Code that describe the role and responsibilities of a non‑executive director, the guidance sets out best practice (i) before joining a board and (ii) on appointment to a board. Before joining a board Prior to joining a board, prospective non‑executive directors should:
undertake their own due diligence of the company to ensure they have confidence in the company and can make a strong contribution to it; understand that more is expected from a director with specific skills and ensure that they spend time developing and refreshing those skills; recognise that part of their role is to uphold high standards of integrity and, together with the chairman and executive directors, to instil the appropriate culture and values in the boardroom and the company; review the letter of appointment (which should state the minimum time commitment expected to fulfil the role and the possibility of additional time commitments) and raise any concerns before signing; and understand their duties regarding conflicts of interest, gifts and hospitality as set out in the CA 2006 and to declare any potential or actual conflicts of interest.
On appointment to a board Newly‑appointed non‑executive directors should:
receive a comprehensive induction programme and have personal input into their training which should be tailored to their needs; understand that their role is to provide independence, oversight and constructive challenge to the board and to contribute to the development of strategy using their experience and expertise; ensure that they receive a schedule of future board and committee meetings in advance so that they have the opportunity to attend; insist on receiving accurate, comprehensive and up‑to‑date information in advance of meetings and any other important information that arises between meetings; discuss any concerns with the company’s executives and speak to the company’s advisers (such as the external auditor) or take independent professional advice at the company’s expense if they consider it necessary; ensure that they make all decisions objectively in the interests of the company; familiarise themselves with company procedures for dealing with conflicts of
interest or gifts and hospitality; and appreciate that circumstances may arise such that they may need to consider resigning from a board.
Case involving failure by non‑executive directors In the recent case of Newcastle International Airport Ltd (NIA) v Eversheds LLP, which concerned a dispute over new service contracts drafted by solicitors which gave the executive directors significant bonuses as part of a refinancing deal, the Court found that the loss suffered by the company was because its non‑executive directors failed to carry out their obligations to the company in relation to the contracts. The company determined its executive pay through a remuneration committee comprised only of non‑executive directors and that committee failed to follow proper procedures for fixing the remuneration packages. It was clear that there had been poor consideration and understanding of the proposal papers, the external legal advice and the detail of the legal contracts, and there was poor communication between members of the committee. In particular, the chair of the board and the remuneration committee was criticised for her lack of understanding of the role of chair of the remuneration committee and its significance – an important part of the role was to ensure that the new contractual provisions were subject to independent scrutiny by the remuneration committee. Aside from being a useful reminder of the duties of non‑executive directors and remuneration committee members, the case illustrates the Courts’ willingness to scrutinise the actions of non‑executive directors and lay responsibility at their door. Taking the time to read and take note of the ICSA guidance should help to avoid such situations. The new ICSA guidance will be of particular interest to those advising existing and prospective non‑executive directors and for larger companies who have, or may be looking to appoint, non‑executive directors, who may wish to ensure that all such directors receive copies of the guidance. Company secretaries (and other board members) will also be well advised to ensure they are familiar with the guidance and what is expected of non‑executive directors and their role in facilitating this. As the guidance makes clear, the role of non‑executive director brings with it duties and obligations and it is in the interests of all concerned to get the selection process and outcome right when filling non‑executive roles and to provide the ongoing training and support required to enable non‑executives in turn to fulfil their duty to support, supervise and scrutinise the business. For a copy of the ICSA guidance, click here. New London Stock Exchange high growth segment In our last Briefing we reported that the Department for Business, Innovation and Skills (BIS) had developed a set of proposals with the LSE to attract entrepreneurs and high‑growth companies to the UK. These are intended to make the UK an attractive and competitive listing destination for high‑growth businesses and provide greater choice for companies seeking capital and investors seeking growth opportunities. In February 2013, the LSE published a draft rule book for the new high growth segment of the Main Market (HGS), the Main Market being the LSE’s principal market for UK and overseas companies. The new segment is expected to launch in March 2013 and is intended for those companies that would like to be admitted to the Official List but have not yet met the eligibility criteria. It is seen as a stepping stone to a full listing on the Official List.
Watson, Farley & Williams March 2013
“Importantly, non‑executive directors need to fully understand the time commitment necessary to fulfil the expectations of the role, which may be significant...”
“Aside from being a useful reminder of the duties of non‑executive directors and remuneration committee members, the case illustrates the Courts’ willingness to scrutinise the actions of non‑executive directors and lay responsibility at their door.”
>
>
>
>
>
>
>
>
>
>
>>
>
04 05 UK: CORPORATE BRIEFING UK: CORPORATE BRIEFING
Under the new rules, companies may be admitted to the HGS if they meet the eligibility criteria which include:
the company must show growth in revenue (on a Compound Annual Growth Rate (CAGR) basis (as defined in the rules)) of 20 per cent or more over a three year period; the company must be an EEA incorporated, active commercial company; at admission, the company must have at least 10 per cent of its securities in public hands; the value of the securities in public hands must be at least £30 million, the majority of which must be raised at admission by the issue of new securities or sale of existing securities from the same class as that to be admitted; and the securities must form part of the companyʹs equity share capital.
In addition, prior to admission, the company must publish an approved prospectus. This must include a prominent statement to the effect that it is not admitted to the Official List and a non‑binding statement that it intends to apply for admission to the Official List in the future. The HGS will be a segment of the LSE’s EU regulated market but companies admitted to it are not “listed”. Accordingly, HGS companies will not be subject to the Listing Rules but will be subject to other rules that apply to issuers such as the FSA’s (shortly, the FCA’s) Disclosure Rules and Transparency Rules and the Prospectus Rules. As a transitional route to the Official List, the HGS will provide access to further capital and a public platform to continue growth whilst preparing companies for the listed markets over time and ensuring that appropriate standards of investor protection are maintained. Changes to the UK security registration regime On 6 April 2013, the new regime for the registration of company charges will come into force and will apply to any charges created on or after that date. The regime provides for a single simplified UK‑wide system of registration for companies and will be adapted for limited liability partnerships (LLPs). Under the new regime, electronic filing will be possible and, for the first time, a copy of the charge instrument will be placed on the public record. The 21 day period for registration (beginning with the day after the date of creation of the charge) remains but the criminal offence for failure to register a charge has been removed (although the commercial sanction of invalidity against a liquidator, administrator or creditor of the company remains). Unlike previously, all charges must be registered unless expressly excluded by the amended legislation. New forms will be available from Companies House which require less information than the previous forms. Each registered charge will be allocated a unique reference code which is intended to make searching and tracking of charges easier. As a result of the changes, UK companies and LLPs will no longer be required to keep their own registers of security with their books (but will need to make copies of relevant instruments available for inspection). Changes to share buy‑backs In July 2012, BIS published the Nuttall Review on employee ownership which explored the existing difficulties with employee ownership and put forward a suggested framework for overcoming such problems. One of the suggestions was simplification of the share buy‑back process for private companies under the CA 2006. BIS launched a consultation on the recommendations in October 2012 and published a response in February 2013 and revised draft regulations in March 2013. Whilst the main driver for the changes is to facilitate share buy‑backs in the context of an employee share scheme, certain of the recommendations will benefit all private companies seeking to undertake a buy‑back whether in the context of an employee share scheme or not.
The proposed amendments to CA 2006 will allow:
off‑market share buy‑backs to be authorised by ordinary resolution – currently a special resolution is required; the prior approval of multiple off‑market share buy‑backs for the purposes of or pursuant to an employee share scheme to be authorised by a single ordinary resolution; private limited companies to pay for their own shares in instalments (where the buy‑back is for the purposes of or pursuant to an employees’ share scheme); private limited companies to finance buy‑backs (for the purposes of or pursuant to an employee share scheme) out of capital subject to the signing of a solvency statement by the board of directors and shareholder approval by special resolution; private limited companies to buy back shares using small amounts of cash (an amount not exceeding the lower of £15,000 or the cash equivalent of 5 per cent of share capital in any financial year) that does not have to be identified as distributable reserves, where the articles of association authorise this; and all companies limited by shares (public or private) to hold their own shares in treasury and to deal with such shares as treasury shares.
The changes are expected to come into force on 30 April 2013. The Government intends to conduct a further review three years after enactment of the changes to, among other things: consider allowing short notice resolutions, review the payment by instalment provision and consider whether in fact this proves to be disadvantageous to departing shareholders or creditors, and consider whether there have been any adverse effects of the changes to allow all companies to hold treasury shares. Cases Two recent cases serve as a reminder that clear and unequivocal drafting is paramount in commercial contracts and the job of the Courts is not to rewrite the contract where parties have more than enough know‑how and experience to write the contract themselves. Warranties and representations – buyer beware Sycamore Bidco Ltd v Breslin and Dawson [2012] EWHC 3443 (Ch) In Sycamore, the High Court considered whether a breach of warranty in a share purchase agreement could also give rise to a claim for misrepresentation even if the warranties in the agreement were not expressly stated to be representations. The value of the claim for breach of warranty was around £4.75 million whereas the claim for misrepresentation was for the entire purchase price of around £17 million. By way of reminder, a warranty is a term of the contract which will usually contain an assurance about the target asset which, if found to be untrue, will give the aggrieved party a right to claim contractual damages (i.e. damages that would put the claimant in the position it would have been in had the warranty been true). A representation is a statement of fact or law which will induce the recipient to enter into a contract; it is normally pre‑contractual but may be repeated in the contract. If a representation is found to be untrue, it will give the aggrieved party a right to rescind the contract and/or claim tortious damages (i.e. damages that would restore the claimant to its pre‑contractual position as if the misrepresentation had never been made). The judge determined that the warranties in question were not also representations because, among other things, there was a clear distinction at law between the two and
Watson, Farley & Williams March 2013
“...the HGS will provide access to further capital and a public platform to continue growth whilst preparing companies for the listed markets over time...”
“...certain of the recommendations will benefit all private companies...”
“The changes are expected to come into force on 30 April 2013. The Government intends to conduct a further review three years after enactment...”
>
>>
>
>
>
>
>
>
>
>
04 05 UK: CORPORATE BRIEFING UK: CORPORATE BRIEFING
Under the new rules, companies may be admitted to the HGS if they meet the eligibility criteria which include:
the company must show growth in revenue (on a Compound Annual Growth Rate (CAGR) basis (as defined in the rules)) of 20 per cent or more over a three year period; the company must be an EEA incorporated, active commercial company; at admission, the company must have at least 10 per cent of its securities in public hands; the value of the securities in public hands must be at least £30 million, the majority of which must be raised at admission by the issue of new securities or sale of existing securities from the same class as that to be admitted; and the securities must form part of the companyʹs equity share capital.
In addition, prior to admission, the company must publish an approved prospectus. This must include a prominent statement to the effect that it is not admitted to the Official List and a non‑binding statement that it intends to apply for admission to the Official List in the future. The HGS will be a segment of the LSE’s EU regulated market but companies admitted to it are not “listed”. Accordingly, HGS companies will not be subject to the Listing Rules but will be subject to other rules that apply to issuers such as the FSA’s (shortly, the FCA’s) Disclosure Rules and Transparency Rules and the Prospectus Rules. As a transitional route to the Official List, the HGS will provide access to further capital and a public platform to continue growth whilst preparing companies for the listed markets over time and ensuring that appropriate standards of investor protection are maintained. Changes to the UK security registration regime On 6 April 2013, the new regime for the registration of company charges will come into force and will apply to any charges created on or after that date. The regime provides for a single simplified UK‑wide system of registration for companies and will be adapted for limited liability partnerships (LLPs). Under the new regime, electronic filing will be possible and, for the first time, a copy of the charge instrument will be placed on the public record. The 21 day period for registration (beginning with the day after the date of creation of the charge) remains but the criminal offence for failure to register a charge has been removed (although the commercial sanction of invalidity against a liquidator, administrator or creditor of the company remains). Unlike previously, all charges must be registered unless expressly excluded by the amended legislation. New forms will be available from Companies House which require less information than the previous forms. Each registered charge will be allocated a unique reference code which is intended to make searching and tracking of charges easier. As a result of the changes, UK companies and LLPs will no longer be required to keep their own registers of security with their books (but will need to make copies of relevant instruments available for inspection). Changes to share buy‑backs In July 2012, BIS published the Nuttall Review on employee ownership which explored the existing difficulties with employee ownership and put forward a suggested framework for overcoming such problems. One of the suggestions was simplification of the share buy‑back process for private companies under the CA 2006. BIS launched a consultation on the recommendations in October 2012 and published a response in February 2013 and revised draft regulations in March 2013. Whilst the main driver for the changes is to facilitate share buy‑backs in the context of an employee share scheme, certain of the recommendations will benefit all private companies seeking to undertake a buy‑back whether in the context of an employee share scheme or not.
The proposed amendments to CA 2006 will allow:
off‑market share buy‑backs to be authorised by ordinary resolution – currently a special resolution is required; the prior approval of multiple off‑market share buy‑backs for the purposes of or pursuant to an employee share scheme to be authorised by a single ordinary resolution; private limited companies to pay for their own shares in instalments (where the buy‑back is for the purposes of or pursuant to an employees’ share scheme); private limited companies to finance buy‑backs (for the purposes of or pursuant to an employee share scheme) out of capital subject to the signing of a solvency statement by the board of directors and shareholder approval by special resolution; private limited companies to buy back shares using small amounts of cash (an amount not exceeding the lower of £15,000 or the cash equivalent of 5 per cent of share capital in any financial year) that does not have to be identified as distributable reserves, where the articles of association authorise this; and all companies limited by shares (public or private) to hold their own shares in treasury and to deal with such shares as treasury shares.
The changes are expected to come into force on 30 April 2013. The Government intends to conduct a further review three years after enactment of the changes to, among other things: consider allowing short notice resolutions, review the payment by instalment provision and consider whether in fact this proves to be disadvantageous to departing shareholders or creditors, and consider whether there have been any adverse effects of the changes to allow all companies to hold treasury shares. Cases Two recent cases serve as a reminder that clear and unequivocal drafting is paramount in commercial contracts and the job of the Courts is not to rewrite the contract where parties have more than enough know‑how and experience to write the contract themselves. Warranties and representations – buyer beware Sycamore Bidco Ltd v Breslin and Dawson [2012] EWHC 3443 (Ch) In Sycamore, the High Court considered whether a breach of warranty in a share purchase agreement could also give rise to a claim for misrepresentation even if the warranties in the agreement were not expressly stated to be representations. The value of the claim for breach of warranty was around £4.75 million whereas the claim for misrepresentation was for the entire purchase price of around £17 million. By way of reminder, a warranty is a term of the contract which will usually contain an assurance about the target asset which, if found to be untrue, will give the aggrieved party a right to claim contractual damages (i.e. damages that would put the claimant in the position it would have been in had the warranty been true). A representation is a statement of fact or law which will induce the recipient to enter into a contract; it is normally pre‑contractual but may be repeated in the contract. If a representation is found to be untrue, it will give the aggrieved party a right to rescind the contract and/or claim tortious damages (i.e. damages that would restore the claimant to its pre‑contractual position as if the misrepresentation had never been made). The judge determined that the warranties in question were not also representations because, among other things, there was a clear distinction at law between the two and
Watson, Farley & Williams March 2013
“...the HGS will provide access to further capital and a public platform to continue growth whilst preparing companies for the listed markets over time...”
“...certain of the recommendations will benefit all private companies...”
“The changes are expected to come into force on 30 April 2013. The Government intends to conduct a further review three years after enactment...”
>
>>
>
>
>
>
>
>
>
>
06 07 UK: CORPORATE BRIEFING UK: CORPORATE BRIEFING
this would have been understood by the draftsman of the share purchase agreement; the warranties in the agreement were worded as such at all times (and never as representations) and there was no reason to extend the words beyond their natural meaning. To determine otherwise would mean that the various limitations on liability set out in the agreement would not apply to a claim for misrepresentation (as they were stated as limitations on claims under the warranties) and the Court pointed out that this would deprive the sellers of a large part of their protection which would be a ʹstrange and uncommercial state of affairsʹ that could hardly have been intended. The case is a clear illustration of the fact that parties to a contract, like the buyer and seller on a share sale, need to think carefully about the range of actions they may wish to pursue against the other if the contract goes wrong. Whereas a seller will wish to restrict the scope of these as much as possible, a buyer may wish to keep its options as wide as possible. In either case, clear wording should be used to express what the parties have agreed. Losing on penalties – seller beware Cavendish Square Holdings BV and another v Makdessi [2012] EWHC 3582 (Comm) In this case, the High Court considered the operation of certain restrictive covenants set out in a share purchase agreement. The seller argued that the relevant provisions amounted to an unlawful restraint of trade (notwithstanding the fact that the seller was a successful businessman and a law firm had been instructed to draft/negotiate the terms of these covenants on his behalf). The Court also considered the clauses of the agreement which dealt with the effect of a breach of restrictive covenant and considered whether the resulting substantial financial loss to the seller was an unenforceable penalty. The clauses provided that, in the event of breach, the buyer would not have to pay future instalments of the consideration and the buyer was entitled to exercise a call option to acquire all of the seller’s remaining shares at net asset value. The Court found in favour of the buyer and held that the disputed provisions were not in restraint of trade or penalty clauses. In relation to penalties, the Court discussed the modern approach to the concept of penalty and rather than being concerned with whether the clause in question gave rise to ‘a genuine pre‑estimate of loss’ the Court instead looked to the more flexible test of whether the clause could, among other things, be commercially justified. The judge held that the clauses could be commercially justified on the grounds that they provided a means for adjustment of consideration where a very substantial sum had been paid for goodwill and enabled decoupling of the parties on a speedy and conventional basis. Whilst Cavendish provides a useful recap of the relevant law on penalty clauses, like Sycamore, it also provides a further recent example of the Courts’ reluctance to interfere in commercially negotiated contracts particularly where these are negotiated on a level playing field between experienced lawyers for both parties and the clauses are neither extravagant nor oppressive.
Watson, Farley & Williams March 2013
“The case is a clear illustration of the fact that parties to a contract ... need to think carefully about the range of actions they may wish to pursue against the other if the contract goes wrong.”
“...a further recent example of the Courts’ reluctance to interfere in commercially negotiated contracts...”
“If the defendant can be ‘found within the district’, Rule B is not available.”
07 UK: CORPORATE BRIEFING
Should you wish to discuss any of the matters raised in this briefing, please speak to a member of our team below or your regular contact at Watson, Farley & Williams.
Chris Kilburn Partner London [email protected] +44 20 7814 8193
Felicity Jones Partner London [email protected] +44 20 7863 8944
Jan Mellmann Partner London [email protected] +44 20 7814 8060
Mark Tooke Partner London [email protected] +44 20 7814 8074
Mark Wandless Partner London [email protected] +44 20 7814 8091
Charles Walford Partner London [email protected] +44 20 7814 8013
Christina Howard Partner London [email protected] +44 20 7814 8189
Nick Fothergill Partner London [email protected] +44 20 7814 8075
wfw.com
All references to ‘Watson, Farley & Williams’ and ‘the firm’ in this publication mean Watson, Farley & Williams LLP and/or its affiliated undertakings. Any reference to a ‘partner’ means a member of Watson, Farley & Williams LLP, or a member of or partner in an affiliated undertaking of either of them, or an employee or consultant with equivalent standing and qualification. This publication is produced by Watson, Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have questions or comments on its subject, please speak to your usual contact at Watson, Farley & Williams. This publication constitutes attorney advertising. © Watson, Farley & Williams 2013 100‑000‑1939 LON KW KW 25/03/2013
Contacts
