Company law update

Lord Davies has recently published his third annual report on the number of women
on the boards of UK FTSE companies. It highlighted good progress over the past year. FTSE 100 companies are collectively on course
to meet their 25 per cent female-representation target by 2015, as recommended in the original report in 2011.

For the third consecutive year, Lord Davies has reported that a growing number of women have been appointed to the boards of UK FTSE companies. The 2014 report notes that women now make up:

 

• 20.7 per cent of the boards of FTSE 100 companies compared with 12.5 per cent in 2011 and 17.3 per cent in April 2013; and
• 15.6 per cent of the boards of FTSE 250 companies compared with 7.8 per cent in 2011 and 13.5 per cent in April 2013.

If the progress continues at the same rate as the previous 12 months, the FTSE 100 companies should meet or exceed their 2015 target.

All-male boards

Furthermore, there’s been a significant reduction in the number of all-male board: only two FTSE 100 companies and 48 FTSE 250 companies (compared with 21 and 131, respectively, in December 2010) are now reported to have them.

Commenting on the progress, Lord Davies said: “The rate of change that we have seen at the heart of our biggest companies over the last three years has been impressive.

“The voluntary approach is working and companies have got the message that better balanced boards bring real business benefits. We are finally seeing a culture change taking place
at the heart of British business.”

However, female representation in executive positions remains low. Women represent only
6.9 per cent of executive directors on FTSE 100 boards and 5.3 per cent on FTSE 250 boards. Further, there are only four female CEOs in FTSE 100 companies and eight in FTSE 250 companies.

Business secretary Vince Cable has said: “More needs to be done to improve the number of women in executive positions. These will be the CEOs of tomorrow and businesses still aren’t tapping into the vast talent pool available to them.”

Company transparency

The government has announced its intention to proceed with its plans to end “the darker side of capitalism” by introducing a public register of company beneficial ownership. The intention is
to increase the transparency in the ownership and control of companies, thus extending its fight against tax evasion and corporate corruption.

Possibly the most significant proposal is the introduction of a public register, to highlight the ultimate owners of UK companies. Obtaining and holding information about ownership and control will be a requirement, while details of anyone
who has an interest in more than 25 per cent of
the shares or voting rights or who otherwise exercises control over the management must
be given to Companies House.

The register should include the beneficial owner’s full name, address and details of their shareholding, as well as the beneficial owner’s nationality, date of birth, usual country or state of residence and their service address. This information will need to be updated at least once every year and will be accessible by the public.

This would seem to bring an end to the usefulness of any existing private nominee arrangements in place, which may have a genuine commercial reason behind them and is in no
way connected to tax evasion or avoidance.

The government also intends to proceed with the proposal to prohibit creating new bearer shares and intends to specify a period of about nine months during which existing bearer shareholders must surrender their shares for conversion to the relevant registered ones.

In addition, the government intends to ban corporate directors, subject to certain exemptions, making it easier to establish the true directors of
a company.

The proposals are set to apply to all UK companies and limited liability partnerships.  However, the government intends to grant
an exemption for public companies listed on a regulated market, for example the main market
of the London Stock Exchange. Campaigners
have called the plans a “historic step” in the fight against corruption.

Vince Cable has said: “The UK is already one
of the best places in the world to start, grow and run a business. However, for consumers, investors and the wider public to really trust a company
they need to know who is really in charge.

“This is why I’m making sure we take tough action tackling the darker side of capitalism, and the smoke and mirrors, which have existed for too long. No longer will UK companies be able to use complex structures and trails of paperwork to
hide information and keep the public in the dark.”

There has been criticism of the plans, though, including from the Law Society. It said that “the proposals may damage the attractiveness and competitiveness of the UK as a jurisdiction for the incorporation of companies.

“We believe that the effect of introducing the proposals will be to drive investors to form companies outside the UK and that the UK could therefore lose a considerable amount of business as a result.”

Legitimate interests

Restrictive covenants are contractual terms restricting an employee’s activities after termination of their employment. To be enforceable, they must go no further than
is reasonably necessary to protect the legitimate business interests of the employer.

In particular, non-compete restrictions,
which prohibit the employee from working for competitors of the company after termination of their employment, have traditionally been harder to enforce than other types of restrictions.

In Prophet plc v Huggett [2014] EWHC 615 (Ch), the High Court granted an injunction to enforce
a 12-month non-compete restrictive covenant, which, when read literally, offered the employer
no protection at all.

Huggett was employed by Prophet as a software developer and its sales manager across the UK. In December 2013, Huggett resigned to join a competitor and requested early release from his 12-week notice period.

Prophet believed that, if Huggett joined the competitor, he would be breaching a non-compete clause contained in his employment contract.

The non-compete restriction prevented Huggett from competing with Prophet “in connection with any products in, or on, which he was involved whilst employed hereunder”. In other words, the clause restricted him from working with any of Prophet’s products.

As Huggett would not have an opportunity to sell Prophet’s products, while working on behalf on a competitor, the restriction, when read literally, was not capable of protecting Prophet’s business interests at all.

Drafting error

However, the court decided that the restriction
did not reflect the true intentions of the parties but it was rather the result of a drafting error.

The court went on to find that the true meaning of the provision could be achieved by inserting the words “or similar thereto” to the end of the clause. The court went on to determine that the 12-month restriction period appeared reasonable.

It should be noted that the court found Huggett to be a “thoroughly unreliable witness”, an assessment, which may have been factored into its decision.

Notwithstanding the outcome, it should be highlighted that the court will only rewrite a restrictive covenant in exceptional circumstances.

Companies should ensure that their restrictive covenants accurately reflect the intentions of the parties and not rely on the courts to correct their drafting mistakes as occurred in this case. SJ

Debbie King is a partner at Farleys