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Auditor Liability Limitation Agreements
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Parts of the Companies Act 2006 (the "Act") are now in force. Some of these provisions affect companies' articles of association. Most of these are deregulatory, so there is no immediate need for companies to amend their articles to incorporate the changes. However, if a company is holding an annual general meeting ("AGM"), it should consider using this opportunity to amend its articles. If so, the main issues below will be relevant.
AGMs
Private companies are no longer required to hold AGMs (although public companies still have to hold them). However, an existing private company's articles may well contain a provision that expressly requires the company to hold an AGM, and such a provision will continue to have effect unless amended. Upcoming AGMs might be an appropriate forum to amend the articles to remove the need to hold AGMs going forward. READ MORE
Even though AIM companies have raised £1.1 billion in the first quarter of 2008, year-on-year comparisons show that both AIM flotation and secondary fundraising activity is considerably down. Although some sectors remain very attractive to investors, such as energy stocks, for many of the smaller AIM companies the usual institutional investors have all but closed their books - a company with a market capitalisation of £10 million or less is not considered small cap but micro cap. Furthermore, for many companies a history of poor liquidity and the attendant undervaluation of the company has made equity fundraisings and the use of shares as an acquisition currency too expensive. Consequently, many companies are reviewing whether the reasons for obtaining an AIM listing in the first place still hold true.
A good example of this is Imagesound plc, a supplier of in-store music, radio and TV services, that came to AIM by way of a reverse takeover in 2004. The company recently announced that it will cancel its listing and has cited three main reasons: (i) it considers that its shares have been consistently undervalued thus making the equity financing of acquisitions too expensive; (ii) it expects to be able to save £150,000 a year in AIM-related costs; and (iii) it considers that a disproportionate amount of senior management time is spent on meeting AIM requirements such as investor relations and disclosure requirements. Upon de-listing the company has chosen to remain a public company and will appoint a market maker to provide a matched bargain facility that will offer a price valuation to any shareholders wishing to buy or sell shares in the company, and will also maintain a list of any prospective buyers or sellers. By way of comparison, Platinum Mining Corporation of India plc, which cancelled its AIM listing at the end of April, has chosen to re-register as a private company and will make an offer to buy back the shares of the minority shareholders. Gold Frost plc, a Mishcon client, has recently cancelled its AIM listing and has informed shareholders that future trades will have to be effected off market at a price to be agreed between the relevant parties (although the custodian and settlement services for its depositary interest holders will be continued).
To de-list from AIM, a special resolution of shareholders is required. However, de-listing should not be seen as a purely mechanical process because the company will need to be prepared for the possible negative press that may emanate from investors who bought into a listed company and who will have even less liquidity in a de-listed company. The announcement of the de-listing is itself likely to depress the price.
Many companies will continue to be happy with their AIM listing, but for those companies that may be considering a de-listing they should of course consider all options. This is because it may well be a false economy to step down now only to be tempted to go through the flotation process again in 12 months time. If liquidity and valuation are the cause for concern, then in conjunction with exploring investor profile raising initiatives with their broker and PR agency a company should also consider whether a dual-trading arrangement could be of benefit. AIM companies can now take advantage of the relatively recent option since November 2007 to potentially improve their trading by also registering on London's PLUS-quoted platform (formerly known as Ofex). For the month of January 2008 the volume of retail trades on PLUS exceeded that of the London Stock Exchange. Alternatively, companies might seek a secondary listing, as did Mishcon client Cubus Lux plc in March this year with a dual listing on AIM and the Frankfurt Stock Exchange. NYSE's Euronext market is also increasingly popular with AIM companies: Accsys Technologies plc obtained a secondary listing on Euronext Amsterdam in September 2007 and Proventec plc is currently seeking a dual listing on Alternext (operated by Euronext Paris). Furthermore, Northern European Properties Ltd, a Russian and Baltic property investor, floated on AIM in November 2006 and also listed on Euronext Amsterdam in December 2007 but due to lack of liquidity it now intends to cancel its AIM listing with effect from the end of April 2008.
If it is concluded that a continued listing is no longer required the decision will need to be made whether to re-register the company as a private company (which will require a special resolution) or to leave it as a public company. Although an unlisted public company still has more onerous provisions to comply with under the Companies Acts, retaining public company status may still facilitate further equity capital raisings by way of a private placement.
For more information on this topic please contact: Ross Bryson on +44 (0)20 7440 7190 or e-mail ross.bryson@mishcon.com |
With current stock market volatility, and many leading financial experts predicting an economic slowdown, it seems timely to review the liability of directors for wrongful trading.
If a company goes into insolvent liquidation, the liquidator may look to current and former directors of the company for financial contributions if, at some point before the start of the winding up process, the directors knew or ought to have realised that there was no reasonable prospect that the company would avoid insolvent liquidation.
Liability can extend to "shadow directors", i.e. persons who are not formally appointed as directors, but who give directions or instructions which are followed by the board. For example, if a subsidiary goes into insolvent liquidation, it may be that its parent company could be liable for wrongful trading.
It is a defence for a director to show that, knowing that there was no reasonable prospect that the company would avoid going into insolvent liquidation, the director took every step with a view to minimising the potential loss to the company's creditors as he ought to have taken.
If a company is in financial difficulties, the directors should ensure that they have access to up to date financial information at all times, so that they can monitor and assess the company's financial health on an ongoing basis. It is not an answer for a director to bury his head in the sand, since a director will be judged by reference to what a reasonable director would have known and done. The directors should ensure that they meet regularly to discuss the company's position, and keep a record of business decisions in company board minutes. Directors should also make sure that they are aware of the terms of any financial covenants which the company has given to its lenders.
Obvious indicators that a company is in financial difficulty include: (i) late filing of accounts, (ii) being insolvent on a balance sheet basis, i.e. the company's assets are insufficient for the payment of its debts and other liabilities (including future and contingent liabilities), even if it is not insolvent on a cash-flow basis, (iii) increasing pressure from creditors, or creditors withholding supplies, (iv) only paying creditors when legal action is commenced.
If a director fears that there is no reasonable prospect of avoiding insolvent liquidation, he must consult with the rest of the board, and the board should take legal advice as to whether the company can continue to trade, and contact an insolvency practitioner if appropriate. Until professional advice has been obtained, it would be advisable for the company to cease incurring further liability to creditors.
It is not necessarily advisable for a director to "jump ship" and resign if the company appears to be heading towards insolvent liquidation. A director is expected to take every step to minimise the potential loss to creditors that he ought to take. This often means that a director should stay at the helm and ensure that all appropriate steps are taken to implement a rescue package, or to commence a formal insolvency procedure. However, it follows that if one director believes a company is insolvent but cannot persuade his fellow directors to take advice or review the company's financial position properly, he may feel the need to resign.
For more information on this topic please contact: Danny Davis on +44 (0)20 7440 7075 or e-mail danny.davis@mishcon.com or Matthew Lindsay on +44 (0)20 7440 7138 or e-mail matthew.lindsay@mishcon.com |
On 2 May 2008 the Department for Business Enterprise and Regulatory Reform ("BERR") published legislation relating to the new solvency statement route for capital reduction in private companies, which will come into effect on 1 October 2008. This route is an alternative to the court approved procedure and allows private companies to reduce their share capital by special resolution if the directors make a statement in the required form as to the solvency of the company over the next twelve months (having regard to both contingent and prospective liabilities). If a reduction is carried out in this way, the prohibition on distributing a reserve arising from a reduction of capital does not apply and the reserve can be treated as a realised profit. Accordingly, private companies unable to distribute cash due to accumulated losses may now find it easier to remove their dividend traps.
A specific authorisation in a company's articles to reduce its share capital will no longer be required. A company will be permitted to reduce its capital unless there is a specific prohibition or restriction in its articles.
Parts of the Companies Act 2006 (the "Act") are now in force. Some of these provisions affect companies' articles of association. Most of these are deregulatory, so there is no immediate need for companies to amend their articles to incorporate the changes. However, if a company is holding an annual general meeting ("AGM"), it should consider using this opportunity to amend its articles. If so, the main issues below will be relevant.
AGMs
Private companies are no longer required to hold AGMs (although public companies still have to hold them). However, an existing private company's articles may well contain a provision that expressly requires the company to hold an AGM, and such a provision will continue to have effect unless amended. Upcoming AGMs might be an appropriate forum to amend the articles to remove the need to hold AGMs going forward.
If a private company does decide to retain AGMs, it is now able to amend its articles to require only 14 days' (as opposed to 21 days') notice. The 21 day requirement remains for public companies.
General meetings
General meetings of members can now be held on 14 days' notice, even if a special resolution is proposed, so articles requiring 21 days' notice can be deleted. The word "extraordinary" can be removed from "extraordinary general resolution" and "extraordinary meeting" as this term is no longer used.
Votes of members
Under the Act, proxies are now entitled to vote on a show of hands, whereas previously proxies were only entitled to vote on a poll. This should be amended.
Articles should also be amended to allow for the fact that multiple proxies may be appointed, provided that each proxy is appointed to exercise the rights attached to a different share held by the shareholder.
Weekends and bank holidays can also be excluded from the time counting towards the minimum 48 hour notice period required to appoint proxies.
Written resolutions
Public companies can no longer pass written resolutions, so articles for public companies should be amended accordingly.
Secretary
Private companies no longer need to have a secretary. If a private company wishes to take advantage of this, but its articles contain a provision requiring a secretary, it must first delete this article.
Age of directors
There is no longer a statutory age limit on directors. Articles retaining a limit could infringe the Employment Equality (Age) Regulations 2006 and so should be deleted.
Electronic and web communications
Various provisions of the Act allow companies to communicate with members by electronic and/or website communications and articles should be amended to reflect this.
Directors' indemnities and defence funding
The Act has, to a certain extent, broadened the powers of a company to indemnify directors and to fund expenditure incurred in connection with certain actions against directors. In particular, a company can now provide money for the purpose of funding a director's defence in regulatory proceedings. Articles should be checked to ensure that the directors' indemnity and insurance provisions are consistent with the Act, to allow the maximum protection available.
This is not an exhaustive list of amendments that can be made to the articles. Please contact us if you require any more information.
For more information on this topic please contact: Tina Archer on +44 (0)20 7440 4731 or e-mail tina.archer@mishcon.com |
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Disclaimer This newsletter is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice. |
