Update: company

Fraudulent misrepresentation

In Erlson Precision Holdings Ltd (formerly GG 132 Ltd) v Hampson Industries plc [2011] EWHC 1137, the High Court held that the buyer of a company was induced to enter into a share purchase agreement (SPA) by a fraudulent misrepresentation and was therefore entitled to rescind the contract.

In cases involving a purchase of a company it is unusual for rescission to take place as the right to rescind has usually been lost because it is no longer possible to place the parties back in the pre-contractual position, or because the buyer is deemed to have affirmed the contract. However, in this case the misrepresentation was notified to the sellers only hours after completion of the transaction and the right to rescind was asserted less than one week later.

The misrepresentation arose following various requests from the buyer for income and customer forecasts on several occasions over a ten-month period leading up to completion. All these forecasts included the target company's second biggest customer even though that customer had terminated its supply arrangement with the target company a few months after the initial forecasts had been supplied to the buyer. The CEO of the target company was aware that the false forecasts were being presented to the potential buyer, but decided not to correct the forecast or inform the buyer of any inaccuracies. The buyer relied on the forecasts and completion of the SPA was subsequently finalised.

It was found that the CEO ought to have known what the effect of the customer's termination would have on the purchase of the company and that he had therefore mislead the buyer. It was sufficient to show that he knew that the representation should have been corrected before being sent to the buyer.

Removing company directors

In Smith v Butler [2011] EWHC 2301 (Ch), the court allowed the quorum to be reduced to one, to allow a board meeting to take place to remove a director from the company.

Mr Smith, the claimant, was the majority shareholder with 68.8 per cent of the shares and was also a director and the chairman of the company. The only other shareholder, the defendant, held the other 31.2 per cent of the shares and was also the company's managing director. There was another director, the financial director, but he held no shares.

According to the company's articles, no meeting of the members could be held unless a quorum of two was present (one of whom must be Mr Smith), and the same rules applied as to meetings of the directors.

The defendant purported to suspend Mr Smith from the company while an investigation took place as to whether Mr Smith had been involved in cheque fraud a few years earlier, which would have been in breach of his duties. There was no board resolution authorising the suspension, however. Following the suspension, the remaining two directors made all the decisions on behalf of the company without reference to Mr Smith. Mr Smith was unhappy with the running of the company and therefore wanted to call an EGM to consider the removal of the remaining directors from the company. The defendant made it clear that he would not attend, thus making the meeting inquorate.

Mr Smith applied to court under section 306 of the Companies Act 2006 to allow a meeting to take place with a quorum of one. The court authorised such a meeting to take place as they believed Mr Smith, as the majority shareholder, should be entitled to exercise his ordinary voting rights to appoint and remove directors. In addition, the court held that the alleged cheque fraud should have no bearing on Mr Smith's right to exercise his voting rights as the majority shareholder.

Bribery Act

The Act came into force on 1 July 2011 and introduced two new offences. The main one for commercial organisations to be aware of is failure of a commercial organisation to prevent bribery.

Section 7 of the Act provides that an offence is committed by a relevant commercial organisation if a person associated with it bribes another person with the intention of obtaining or retaining business or an advantage in the conduct of business for that organisation.

An 'associated person' is defined widely and can include people who perform services for, or on behalf of, the organisation regardless of their capacity.

A defence is available for all companies if they can show that they have in place 'adequate provisions' to prevent bribery in their company. Guidance has been introduced by the Ministry of Justice which commercial organisations can put in place to prevent a person associated with them from being found in breach of section 7 of the Act.

There are six main principles set out in the guidance:

i) having proportionate procedures in place to deal with the bribery risks of the organisation;

ii) a commitment from the top of the organisation to prevent bribery occurring in their organisation;

iii) the organisation conducting a proportionate risk assessment to discover the nature and extent of the risks of bribery occurring within its organisation;

iv) the organisation applying proportionate due diligence procedures in respect of people who are to perform services for/on behalf of the company;

v) ensuring that the bribery policies and procedures are understood throughout the organisation through proportionate communication, including training; and

vi) ensuring that the procedures are monitored and reviewed.

Organisations found to be in breach of the Act face unlimited fines and their directors could face a jail sentence of up to ten years.

Takeover reforms

Changes to the takeover code came into force on 19 September 2011. These have significantly strengthened the position of companies that are subject to takeover interest.

The position of such target companies was called into question following the recent takeover of Cadbury from Kraft. Kraft initially approached Cadbury privately in August 2009 with an offer to buy the UK chocolate maker but managed to drag out the takeover through to January 2010. During that time Cadbury's share price dropped significantly because of the rumours of the bid. This kind of instability is not unusual in such cases and can be harmful to the target company, forcing them to accept lower offers than they would have expected to do so before such interest became apparent.

After the reforms, any target company that becomes aware of a potential interest must make a public announcement of such interest, identifying every potential bidder with whom the target company is in talks with and any approaches that have been made to the target company which have not been outwardly rejected.

This announcement will instigate an 'offer period' which means that the potential bidder has a maximum of 28 days from the date of the announcement to either make a firm offer or confirm that it does not intend on making an offer to the target company. A six-month cooling off period will be enforced on the potential bidder if it has decided not to make an offer.

These deadlines should ensure that the balance of power has shifted back into the hands of the target company.

SIC code changes

From 1 October 2011, Companies House has adopted the 2007 version of the UK SIC (standard industrial classification) codes across their systems in place of the 2003 version. These codes are used to classify a businesses activity.

All companies filing an annual return with a made-up date on or after 1 October 2011 will need to use the new codes.

Names on documents

From 1 September 2011, Companies House will no longer accept company names on documents submitted to them which contain minor variations or typographical errors.

This is primarily to ensure that documents are entered on the correct company record, but also to ensure that there are less documents being rejected (with the hope that companies are more careful after reading the new rules).

The only exceptions to the rules are:

1. 'Co' may be used instead of 'company'.

2. '&' may be used instead of 'and'.

3. The word 'the' may be omitted, but only at the front of a company name.

4. Certain standard abbreviations, such as 'ltd', 'plc' and 'LLP', will continue to be accepted.

Women on boards

The first deadline set by Lord Davies' report Women on Boards, which is trying to increase the number of women on company boards, has now passed.

At the end of July some of the most senior politicians in the UK, including Vince Cable and Theresa May, wrote to all FTSE 350 companies pressurising them to meet Lord Davies' deadline to increase the number of women on their boards by September 2011.

The ultimate aim is to increase the number of women on the boards of FTSE 350 companies by 25 per cent by 2015, but upcoming results will give an indication of how companies are progressing with these recommendations. According to early reports 30 per cent of FTSE 100 board appointments so far this year have been women, a significant increase on previous years, but whether this will be enough and whether this trend will continue beyond the initial deadline is difficult to predict.