CorporateThe Metropolitan Counsel® www.metrocorpcounsel.com Volume 15, No. 5 © 2007 The Metropolitan Corporate Counsel, Inc. May 2007 Legal Update – Corporate Law Changes In The UK John D. Vaughan and Stuart Borrie KIRKPATRICK & LOCKHART PRESTON GATES ELLIS LLP Jack Vaughan and Stuart Borrie are cor- porate partners at K&L Gates. Mr. Vaughan, resident in the New York office, has extensive experience in advising busi- nesses and entrepreneurs in a variety of corporate and financial transactions. He has represented issuers (both public and private), agents and investors in a variety of equity financing transactions, including Reg D and Reg S private placements, and venture capital and other privately negoti- ated transactions. He has also represented businesses, shareholders, management John D. Vaughan Stuart Borrie and acquirors in all aspects of merger and fully listed and AIM listed companies. Mr. of UK corporate law, the Companies Act acquisition transactions, including pur- Borrie has been involved in a large num- 1985 is being replaced (just as it replaced chases and sales of divisions, management ber of international transactions and the Companies Act 1948, which in turn buy-outs, roll-ups and ESOP buy-outs. His worked in Hong Kong for a year. He can replaced the Companies Act 1929.) The representation of borrowers (public and be reached at +44 (0) 7360 8155. This changes are not fully in force yet and are private) and lenders (private and institu- article is for information purposes only expected to come into effect over the next tional) has involved senior and subordi- and does not contain or convey legal 18 months or so. This article explores the nated debt, secured and unsecured advice. The information herein should not more major changes so that General Coun- facilities, foreign currencies, gold lending, be used or relied upon in regard to any sel and senior in-house lawyers may be syndicated and direct facilities. Mr. particular facts or circumstances without better informed as they are implemented. Vaughan has also represented airlines and first consulting with a lawyer. Some of these changes are moves closer to aircraft manufacturers in leverage aircraft the U.S. approach. lease transactions. His experience has Once in a while lawmakers like to involved a wide variety of industries, from Inspection Of The Register Of make a fresh start, consolidate, set out core manufacturing to biotech and high- Members tech, and has been both national and new rules of engagement. While there are As part of a longstanding principle international. He can be reached at (212) regular amendments and adjustments to about transparency for UK companies, it 536-4006. Mr. Borrie, resident in the Lon- law, it is not often that a whole area of law has been possible for anyone to inspect the don office, advises on a variety of corpo- gets a complete re-write. In the UK these register of members of any UK company. rate matters. He has extensive experience changes occur in corporate law once in a However, there has been a good deal of with sales, mergers and acquisitions, and generation. The Companies Act 2006 was controversy recently about anti-vivisec- management buyouts, acting for both buy- put on the statute book on 7 November tionists sending literature, sometimes inac- ers and sellers. He has experience in 2006, and it constitutes a total re-write of curate, and even issuing threats, to advising on flotation and transactions for UK corporate law. The last major re-write shareholders of large pharmaceutical com- Please email the authors at [email protected] or [email protected] with questions about this article. Volume 15, No. 5 © 2007 The Metropolitan Corporate Counsel, Inc. May 2007 panies, such as GlaxoSmithKline. Accord- shareholders in corporations, both private is going to open the floodgates to a huge ingly, the Companies Act 2006 provides and public, are generally entitled to the number of actions. Our view is, however, that any person wishing to inspect a com- same information as record holders. robust on this point. The Court’s consent pany’s register of members must provide Directors will need to be obtained before bringing a their name and address and state the pur- As in the U.S., the general duties of claim and this should limit the number of pose for which the information will be actions brought by shareholders. The used. The company may apply to a Court directors have, until now, generally been a Companies Act 2006 requires the Court to for relief if it believes that the information matter of common law in the United King- will be used for an improper purpose. Dis- dom. The law in the UK is being refuse permission to bring a claim if it expressed in specific statutory require- closure of notifiable holdings (e.g., a 3% determines that a person acting to promote ments. Under the Companies Act 2006, holding under certain UK securities laws) the success of the company would not directors’ duties will be codified in one is unaffected. bring the action, if there is bad faith and if place, including duties to promote the suc- In the U.S., rights under state corporate the matter or thing has been ratified by a cess of the company for the benefit of its statutes, such as the Delaware General majority of the shareholders. In the U.S., members. The Companies Act 2006 sets Corporation Law, to view corporate share- out matters that directors have to consider, derivative actions have long been the cul- holder lists are reserved to shareholders including newly articulated principles ture. only and generally must be provided only such as “the need to foster the company’s upon written demand stating a proper pur- business relationships with suppliers, cus- pose therefor, i.e., a purpose reasonably tomers and others” and having regard to “For the first time, English related to such person’s interest as a share- “the impact of the company’s operation on legislation states how holder. The Delaware General Corpora- the community and the environment.” In shareholders can bring a claim tion Law does not refine this standard the U.S., these are stakeholder statutes and further. No rights are granted to the public are in effect in a number of states, for negligence, breach of duty, generally. However, if the corporation is although not in Delaware. We are advising default or breach of trust, by a public, federal securities laws and our UK clients that in interpreting and director.” exchange rules require some modicum of applying the duties as set out in the legis- public disclosure. lation, previous common law rules and equitable principles must still be taken Financial Assistance into account. The GC100, the UK’s panel For generations, a big part of the UK “The Companies Act 2006 was of leading General Counsel, has recently corporate law landscape has been the pro- put on the statute book on 7 issued best practices as to how to address hibition on financial assistance. This is a these changes, which come into force in rule whereby if a person or a corporation November 2006, and it October 2007. is acquiring shares in a company it is not constitutes a total re-write of UK There have been a number of recent lawful for the company or its UK sub- corporate law.” changes in corporate law allowing UK sidiaries to give financial assistance companies to protect their directors from directly or indirectly for the purpose of litigation using indemnities. These that acquisition. For example, it has been changes have been particularly important unlawful in the UK for a target company Rights To Information in many cases for non-executive directors, effectively to support its own acquisition In the UK the use of nominee compa- perhaps taking on a part time role, and are by allowing its assets to be pledged to the nies to hold interests in shares has become in the context of a more litigious culture in acquirer’s bank, without appropriate far more widespread in recent years. The the UK. In the U.S., of course, this has structuring. However, there has long been previous legislation did not contemplate long been the case. a procedure whereby financial assistance this and only gave statutory information The Companies Act 2006 also sets out for private, unlisted targets is permitted, rights to the legal (record) owner of the how directors of UK companies can be provided that certain shareholder resolu- shares, being the nominee companies. brought to account. For the first time, Eng- tions and auditors certificates are pro- Accordingly, the beneficial owners were lish legislation states how shareholders vided. This “whitewash procedure” has sometimes missing out on important infor- can bring a claim for negligence, breach of meant that financial assistance for the mation. Changes in the Companies Act duty, default or breach of trust, by a direc- acquisition of private companies was in 2006 provide for greater information flow tor. This is important because bringing a fact possible, provided that one went to to the beneficial holders of shares. The delinquent director to account has been the expense and difficulty of going holder of beneficial interests in traded greatly hindered in the past by the rule that through the whitewash procedure. The companies (i.e., companies traded on a the directors’ duties are owed to the com- Companies Act 2006 abolishes financial regulated market, such as the London pany as a whole and therefore usually only assistance so far as it applies to private Stock Exchange) will have the right to the company (i.e., the board) was able to companies – a significant change in the receive information in relation to their take action following breach of a direc- UK.