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Essential Corporate News – Week ending March 23, 2018

Publication March 23, 2018


Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

BEIS: Government’s response to consultation on changes to UK merger thresholds to protect national security

On March 15, 2018 the Department for Business Energy and Industrial Strategy (BEIS) announced that it would be introducing to Parliament updated rules to strengthen the Government’s powers to scrutinise takeovers that may raise national security concerns in specific areas of the economy.

This follows publication of the National Security and Infrastructure Review Green Paper in October 2017 which outlined the Government’s plans to take a staged approach, through short and long-term measures, to reform how it scrutinises the national security implications of business transactions.  BEIS has now published the Government’s response to its consultation on the short-term proposals, together with draft guidance on the changes to be made to the turnover and share of supply tests for mergers under the Enterprise Act 2002 and a draft statutory instrument, The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018.

Currently under the Enterprise Act 2002, the Government can intervene in mergers (foreign or domestic) that give rise to specific public interest concerns of national security, financial stability or media plurality. However, intervention can only take place if the transaction meets certain thresholds.  These are that the target company has a UK turnover of over £70 million, or that the merger takes the merging parties’ combined share of supply to 25 per cent or more (or increases an existing share of supply of 25 per cent or more).  There are limited exceptions to this related to some defence and media transactions.

Following the October 2017 consultation, the Government has decided to lower the UK turnover threshold from £70 million to £1 million and remove the current requirement for the merger to increase the share of supply to or over 25 per cent in relation to mergers in the areas of military and dual-use goods, multi-purpose computing hardware and quantum-based technology (the “specified activities”).

The Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 amends the share of supply test so that it is additionally met where a merger or takeover concerns a target involved in any of the specified activities with a 25 per cent or more share of supply of goods or services in the UK before the merger or takeover, as well as where the deal leads to an increase of supply to, or above, this threshold. Subject to Parliamentary approval being obtained for this statutory instrument, a second statutory instrument will be laid to amend the turnover test to allow the scrutiny of more mergers of businesses engaged in any of the specified activities.  It is intended that both Instruments will come into force at the same time.

The Government has published draft guidance explaining why the Government is amending the Enterprise Act 2002. The guidance describes the legal and practical effect of the amendments and offers advice to businesses and others about what they should do (and not do) as a result of these changes.  It also considers the process for any Government interventions in mergers.  At the same time, the Competition and Markets Authority (CMA) has published draft guidance on its approach to the changes to the jurisdictional thresholds for UK merger control.  The CMA has requested comments on its draft guidance by April 12, 2018.

The Government will continue to access risks in other sectors, including emerging technologies, and states that if there is evidence to suggest that it should take action in additional areas of the economy, then it will bring forward further legislation. It also intends to bring forward long-term reforms as set out in its October 2017 Green Paper.  It is currently considering responses received to that and will lay out its plans for long-term reform in due course.

(BEIS, National security & infrastructure investment review, 15.03.18)

BEIS: Insolvency and Corporate Governance – Consultation Paper

On March 20, 2018 the Department for Business, Energy and Industrial Strategy (BEIS) announced it will launch a consultation to improve the UK’s corporate governance framework and ensure the highest standards of behaviour in those who lead and control companies in, or approaching, insolvency.

Among other things, the consultation seeks views on a number of proposed measures, including the following:

  • Sales of businesses in distress: the introduction of new measures to enable directors of parent companies to be held to account and suffer penalties (through disqualification and/or the imposition of personal liability) where they make a decision to sell an insolvent subsidiary which enters into administration or liquidation within two years of the sale, in circumstances where the interests of creditors are adversely affected between the sale and administration or liquidation and, at the time of the decision to sell, the directors could not have reasonably believed that the sale would lead to a better outcome for those creditors than placing it in liquidation or administration;
  • Reversal of value extraction schemes: the introduction of new powers, in addition to those that already exist, to enable insolvency office-holders to reverse transactions, or a series of transactions, which unfairly strip value from a company (ie transactions that have been structured so as to enable value to be extracted from a company being rescued while, at the same time, value is not being added to the company and other creditors are being disadvantaged more than is commercially reasonable) in the event that the company subsequently enters liquidation or administration; and
  • Investigations of directors of dissolved companies: extending the Insolvency Service's existing investigative powers into the conduct of directors to cover directors of dissolved companies.

Following recent company failures, the consultation also seeks views on certain aspects of the wider corporate governance framework that have been highlighted where existing processes and rules may need updating. These include the following:

  • Group structures: This section considers whether steps should be taken to improve governance, account ability and internal controls within complex company group structures;
  • Shareholder responsibilities: This section seeks views on whether there maybe further opportunities, such as through the Financial Reporting Council’s review of the Stewardship Code, to strengthen the role of shareholders in stewarding the companies in which they have investments;
  • Payment of dividends: This section seeks views on whether the legal and technical framework within which dividend decisions are made could be improved and made more transparent while ensuring that dividend payments should remain for directors to decide, having regard to their legal obligations and guidance;
  • Directors’ duties and the role of professional advisers: This section asks if directors are commissioning and using professional advice with a proper awareness of their duties as directors and the requirement to apply an independent mind;
  • Protection for company supply chains in the event of insolvency: This section explores whether supply chain and other creditors should be better protected and, if so, how this could be achieved while preserving the primacy of the interests of shareholders.

Next steps

The consultation seeks views from directors of companies, institutional shareholders and the investment community as well as the wider public. Responses are requested by June 11, 2018.

(BEIS, Insolvency and Corporate Governance, 20.03.18)

BEIS: Register of beneficial owners of overseas companies and other legal entities – Consultation outcome

The Department for Business, Energy and Industrial Strategy (BEIS) published a call for evidence on April 5, 2017 on proposals for a register showing who owns and controls overseas companies and other legal entities that own UK property or participate in UK government procurement. This response, published on March 22, 2018, sets out how the Government plans to implement the register in the light of the responses to the call for evidence and other views gained through the wider consultation process.

The response includes the following:

  • The scope of the new register: The Government intends that all legal forms which can hold properties will be within the scope of the new register’s requirements, while ensuring that there is flexibility in the regime to permit exemptions for types of entity if this seems appropriate (for example, to reduce the burden where there is already transparency of beneficial ownership information).
  • Defining a beneficial owner: The Government intends that the definition of beneficial owner for the new overseas register will be aligned to the definition of a “person with significant control” (PSC) in the PSC regime.
  • Adaptations to definition of people with significant control: The Government intends that entities that are not similar to UK companies limited by shares should use the adaptations listed in the call for evidence to identify their beneficial owners.
  • Entities that already own property: The Government had proposed that the duration of the period given to overseas entities to comply with the new requirements should be one year. Having explored the issue further, the Government has come to the view that it is appropriate for overseas entities to have a longer period of time to comply and will consider the extent to which the one year period should be extended.
  • Entities that wish to buy property: The Government intends to introduce a system of statutory restrictions and of putting notes on the relevant land register, backed up by criminal offences.
  • Overseas entities buying property after the law comes into force: The Government intends to allow the beneficial interest but not the legal title to pass to an overseas legal entity that does not have a valid registration number at completion or settlement.
  • Registration for overseas entities wishing to bid on UK government contracts: The Government intends to require the preferred supplier to provide its beneficial ownership information as a condition of being awarded the contract.
  • Information required about beneficial owners: The Government intends to require the same information for the new register as the information required under the PSC regime.
  • When entities cannot get information about their beneficial owners: The Government intends to require that entities unable to give information about their beneficial owners will be asked to provide information about their managing officers.
  • Keeping the information on the register up-to-date: The Government proposed requiring an update every two years. Having explored the issue further, the Government is considering increasing the frequency of the update in order to achieve the right balance between maintaining an accurate register without creating undue costs and burdens. The preferred approach will be set out when the draft legislation is published.
  • Protection regime: The Government will take account of the suggestions made in the further development of the protection regime.

Next steps

The Government will develop legislation to create the new register and intends to publish a draft Bill for scrutiny this summer. The Government intends to introduce the Bill to Parliament early in the second session. Following Royal Assent and the making of secondary legislation, the Government intends that the register will be operational in 2021.

(BEIS, A register of beneficial owners of overseas companies and other legal entities – Consultation outcome 22.03.18)

European Commission: Communication on the applicable law to the proprietary effects of transactions in securities

On March 12, 2018 the European Commission announced that it had taken a major step towards the development of a Capital Markets Union (CMU) by promoting alternative sources of financing and removing barriers to cross-border investments. The European Commission has adopted a Communication to clarify which country's law applies when determining who owns a security in a cross-border transaction. The proposals are part of the European Commission’s Action Plan for a CMU.

At present, there is no legal certainty as to which national law applies when determining who owns a the underlying asset in a cross-border securities transaction. Three Directives determine in specific cases which national law applies in the case of cross-border securities transactions: the Financial Collateral Directive, the Settlement Finality Directive and the Winding-up Directive. The Communication clarifies that:

  • The meaning of the terms 'maintained' and 'located' are the same: The three Directives define the applicable law by reference to the place of the relevant account. Under the Settlement Finality Directive and the Winding-up Directive, the applicable law is the law where the account or register is "located". The Financial Collateral Directive refers to the law in which the relevant account is "maintained". The European Commission is of the view that "located" means the same as "maintained".
  • Where the account or register is 'located' or 'maintained': The conflict of laws provisions in the Directives do not provide clear definitions of how to determine where the securities account is located or maintained and there is no case law from the European Court of Justice on how these concepts should be interpreted. A number of member states currently interpret and apply the conflict of laws provisions of the Financial Collateral Directive by looking at the place where the custody services are provided, others look at the account agreement for information about the place where the account is maintained and another approach is to determine "maintained" in a way that allows the choice of that member state's law to be valid under the Hague Securities Convention. The European Commission considers, without prejudice to any future decisions of the Court of Justice, that all of these solutions appear to be valid under the relevant EU provisions.

The European Commission states that national authorities and administrations should take into consideration the clarifications provided in the Communication when applying the conflict of laws provisions of the Settlement Finality Directive, the Winding-up Directive and the Financial Collateral Directive. It will continue to monitor developments in this area and, in consultation with stakeholders, assess how national interpretations and market practices evolve in light of international and technological developments.

(European Commission, Communication on the applicable law to the proprietary effects of transactions in securities, 12.03.18)

(European Commission, Factsheet on Delivering on the Capital Markets Union, 12.03.18)

European Commission: Fitness check on the EU framework for public reporting by companies

On March 21, 2018 the European Commission published a consultation paper seeking views on whether the EU framework for public reporting by companies is fit for purpose. This follows on from the publication on February 8, 2018 by the European Commission of an evaluation and fitness check Roadmap on public reporting by companies.

The first objective of the consultation is to assess whether the EU public reporting framework is overall still relevant for meeting its objectives, whether it adds value at the European level, and is effective, internally consistent, coherent with other EU policies, efficient and not unnecessarily burdensome.

The second objective of the consultation is to review specific aspects of the existing legislation as required by EU law, and thirdly it will assess whether the EU public reporting framework is fit for new challenges (such as sustainability and digitalisation).

The consultation will assess other ongoing developments in EU policies that may also have an impact on the public reporting framework (for instance, the Capital Markets Union, Common Corporate Tax Base and the digitalisation of companies’ lifecycle).

The fitness check is part of the actions announced in the Action Plan on sustainable finance published on March 8, 2018. Responses to the consultation should be submitted through an online questionnaire by July 21, 2018. The responses will feed into a Staff Working Document on the fitness of the EU framework for public reporting by companies which is to be published in 2019.

(European Commission, Fitness check on the EU framework for public reporting by companies, 21.03.18)

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