In the second part of our year end recap, we reflect on some of the more notable developments of the past 12 months in the areas of Mergers & Acquisitions, Corporate Governance and Business Crime.
M&A
National Security and Investment Act 2021
The National Security and Investment Act 2021 (NSIA) came into force at the beginning of the year expanding the government's powers to scrutinise certain acquisitions and investments on national security grounds (replacing narrower powers in the Enterprise Act 2002). Under the new regime, where control of (or influence in) a qualifying entity or qualifying asset is gained in circumstances considered to pose a risk to national security, BEIS, acting through its Investment Security Unit, has the power to call-in and potentially intervene in the transaction. The regime also requires mandatory notice to be given of qualifying acquisitions in 17 specified sectors, known as “notifiable acquisitions”. Qualifying acquisitions outside these sectors may be voluntarily notified for clearance if the parties are concerned they might otherwise be called in for assessment.
NSIA only applies if there is an actual or prospective trigger event that meets specified criteria. It does not set materiality thresholds. Consequently the trigger events which qualify for review may include transactions involving start-ups or other smaller entities. In addition the control and influence criteria in NSIA mean that the regime's reach extends beyond M&A transactions (e.g. to investments by way of share subscription).
While the focus is likely to be on foreign direct investment into the UK, NSIA applies to all investors, irrespective of nationality. It follows that domestic acquirers will need to be aware that the regime could be relevant in the context of their deals.
One recent high profile exercise of the government’s powers occurred in May when BEIS called-in for review the acquisition by Nexperia BV (Dutch subsidiary of Shanghai based Wingtech) of the South Wales based semiconductor manufacturer, Newport Wafer Fab. In November BEIS subsequently ordered the sale to be reversed because of national security concerns.
See our previous briefing on NSIA here.
Liability for misleading statements – Autonomy Corporation and Hewlett Packard
In May, the High Court ruled that the former CEO (Dr Mike Lynch) and CFO (Sushovan Hussain) of Autonomy Corporation plc were liable to Hewlett Packard (HP) for misleading statements and misrepresentations contained in Autonomy's annual and quarterly reports in the period leading up to the announcement of HP’s takeover offer for Autonomy in 2011. This was the first time a full trial had been heard on liability for misleading information published by a listed company under s 90A and Schedule 10A of the Financial Services and Markets Act 2000 (FSMA).
Background
Section 90A and Schedule 10A of FSMA make provision for the liability of issuers of securities in connection with published information. In short, these provisions impose liability on an issuer for misleading statements or dishonest omissions in published information, where a “person discharging managerial responsibility” within the issuer (e.g. a director):
knew the statement to be untrue or misleading
was reckless as to whether the statement was untrue or misleading or
knew that there was a dishonest omission of a material fact.
At the time HP made its recommended cash offer of $11.1 billion (in August 2011), Autonomy was the UK's largest software business and a highly profitable FTSE 100 company headed by its CEO and founder, Dr Mike Lynch. Problems quickly emerged post-completion. In November 2012 HP announced that it had written down Autonomy’s value by $8.8 billion, $5 billion of which was attributed to fraud which HP claimed was "linked to serious accounting improprieties, misrepresentation and disclosure failures".
In 2015, HP brought a claim against Dr Lynch and Sushovan Hussain on the basis that they had dishonestly and deliberately misrepresented Autonomy's financial performance during the period Q1 2009 to Q2 2011. HP claimed that it was induced into acquiring Autonomy by dishonest statements and omissions in the company's published information which the defendants knew to be false. HP contended that Autonomy was worth considerably less than the market had been led to believe on the basis of its published information and that HP had been deceived into paying far more than Autonomy was worth.
Claims
The claims were brought under a number of separate heads - at least $4.5 bn of which related to claims under section 90A/ Schedule 10A of FSMA. Under those sections an issuer is liable to pay compensation to an investor who has acquired securities in reliance on the published information for any losses suffered as a result of the untrue or misleading statement or omission, but only where the reliance is reasonable. Claims were also made for fraudulent misrepresentation and breaches of fiduciary and employee duties.
Decision
The court found that HP had established, on the balance of probabilities, that the defendants dishonestly misrepresented the financial position and performance of Autonomy during the relevant period. The ruling was notable for a couple of reasons:
First, under section 90A/Schedule 10A of FSMA a claim can only be brought against an issuer. Here, the issuer was Autonomy, a wholly owned subsidiary of the HP buyer vehicle (Bidco). Consequently, HP was faced with seeking compensation from a wholly owned subsidiary – a pyrrhic victory. In order to overcome this hurdle – and bring a claim against the directors - Autonomy voluntarily accepted full liability to Bidco and this acceptance was used as a stepping stone allowing Autonomy to seek recovery. The Court accepted the 'dog leg' nature of this element of the claim, enabling HP to bring a claim against the defendants rather than its own wholly owned subsidiary.
Secondly, the Court had to consider whether Bidco had relied on the relevant published information in making the acquisition. The challenges included Bidco having being established only a few days before the offer was announced, and the transaction due diligence having been carried out by HP - which was not a party to the claim. The judge accepted that, as the controlling mind of Bidco, HP's reliance on the information could be attributed to Bidco.
Warranty Claims – Notice of Claims
Background
The case relates to a claim for breach of warranty arising from the £1.3bn acquisition in December 2016 by Tullett Prebon (now called TP ICAP) of the brokerage, ICAP. Nex Group had assumed the liabilities of seller ICAP plc under the transaction. Under the terms of the share purchase agreement (SPA), the buyer had a 2 year time limit for the notification of warranty claims (30 December 2018). The written notice would need to state in reasonable detail the nature of that claim and, if practicable, the amount claimed.
Amongst the warranties in the SPA, the seller had stated that, so far as it was aware, no director was, or had been in the 18 months prior to completion, subject to any non-routine investigation, review, or enquiry by a governmental authority nor was any investigation pending or threatened. The warranties in question were qualified by the “seller’s awareness” - defined in the SPA as the actual knowledge of 8 named individuals.
Less than 2 weeks before the notification time limit expired, TP ICAP notified the seller of 2 claims for breach of warranty. These related to investigations by the US Commodities Futures Trading Commission and a German prosecutor. The buyer indicated that the seller must have been aware of both Investigations prior to the deal.
Seller’s defence
The seller applied to the High Court to have certain of the buyer’s claims struck out on the basis that it had failed to comply with the notification provisions of the SPA. In particular, that the letters notifying the claims had not met the degree of detail which would have enabled the seller to investigate the claims. Specifically the seller contended that the notifications were invalid as the letters did not refer to:
the directors under investigation
the amount of the potential financial liability.
Decision
The High Court judge did not agree with the seller deciding that the nature of the warranty claims had been sufficiently stated in accordance with the SPA, which required only reasonable detail of the claim and of quantum if it were practicable to do so. The SPA did not state that the names of the individuals said to have knowledge must be identified in a notification of claim and there was nothing in the SPA requiring the buyer’s notice of claim to include an explanation of how the relevant breach had impacted the target business.
The judge did not offer any view on whether they were “good” claims which was a matter for trial.
Proceedings continue to a trial likely to be held in 2024.
Comment
There are a few points worth noting:
From a buyer’s perspective, the importance of clearly stating the particulars of claim and complying with any contractual notification provisions (include more rather than less information)
From a seller’s perspective, the importance of stipulating the specific minimum details required in a claim notification – rather than relying on practice or interpretation of generic wording.
Aside from the points at issue in this case, it is also worth remembering that a successful claim in damages for breach of warranty needs to demonstrate that the warranty was breached and the effect of the breach is to reduce the value of the target business. The onus is on the buyer to show breach and quantifiable loss.
Corporate Governance - Execution of Documents
In October the City of London Law Society published updated guidance on the use of electronic signatures for executing commercial contracts:
Remote signings The principles set out in the 2009 CLLS guidance on the execution of documents at virtual signings must still be observed when using an e-signing platform. This provides:
In relation to deeds, a signature and any attestation of that signature by a witness must form part of the same physical document containing the deed
The signed document should be a discrete physical entity and the parties should sign an actual existing authoritative version of the document.
The guidance notes that this process can be more straight- forward where the entire final version of the document is uploaded to an e-signing platform.
Witnessing A witness should be physically present when a signatory signs. It is not acceptable for a witness to watch the signatory sign through some form of video conferencing.
Business Crime
In March the Economic Crime (Transparency and Enforcement) Act 2022 (ECA) received royal assent. The legislative process was expedited partly in response to the Russian invasion of Ukraine. The legislation addresses concerns that the UK has become a haven for “dirty money” and is designed to make it easier to identify and trace illicit wealth. Key aspects of the ECA included:
creation of a Companies House identity register for the registration of beneficial owners of overseas entities that own, or have a lease of more than 7 years over, UK land. Failure to register or comply with the duty to update the information, will - in most cases - affect the ability of the entity to sell or lease the land, or create a charge over it, as the other party would be unable to register the transaction with the Land Registry. The ECA also sets out various sanctions that could be imposed on the entity, including fines for directors if they fail to comply.
strengthening the Unexplained Wealth Order regime - first introduced in 2017 – making it easier to obtain orders
lowering the liability threshold for penalties for breaching financial sanctions
In September, the Economic Crime and Corporate Transparency Bill 2022 was introduced to Parliament. Following the ECA, the Bill forms the second part of a package of reforms to prevent the abuse of UK corporate entities and tackle economic crime. It has 3 key objectives:
reforming the powers of the registrar of companies to prevent the use of companies and partnerships for the purposes of economic crime including fraud, money laundering and terrorist financing
strengthening the UK's broader response to economic crime with new powers for law enforcement to seize cryptoassets and enabling the financial services sector to share information more effectively to prevent and detect economic crime
enabling Companies House to deliver a better service and improving the reliability of its data to inform business transactions and lending decisions.
Amongst other things these measures pose important reputational considerations for corporates when doing business.
If you would like to discuss anything arising from this briefing please get in touch.
