• A shareholder suffered unfair prejudice when his shares were valued wrongly in the context of an exit
• Recent changes to exemptions under the UK’s financial promotions regime are reversed
• The FCA publishes further draft rules setting out its proposed new regime for listing securities in the UK
• The Parker Review publishes an update on ethnic diversity in public and large private company senior management
• The Government is consulting on changes to the UK’s anti-money laundering regime and Trust Registration Service

Shareholder suffered unfair prejudice due to failure to use up-to-date financial information

The High Court has held that an exiting shareholder in a company suffered unfair prejudice when the company’s auditor failed to use up-to-date financial information to value the shareholder’s shares under a shareholders’ agreement.

Wells v Hornshaw and others [2024] EWHC 330 (Ch) concerned an unfair prejudice petition brought under section 994 of the Companies Act 2006.

The petitioner held 14.3% of the issued shares in the company. Two brothers each held half of the company’s remaining issued share capital. All three shareholders were also directors of the company.

The company and its shareholders entered into a shareholders’ agreement, which contained a specific procedure to value the shares of a shareholder who wished to exit the company.

In September 2015, the petitioner sent an email stating that he wished to sell his shares in the company. In accordance with the shareholders’ agreement, the company’s auditor was appointed to value the petitioner’s shares.

The auditor completed his valuation in June 2016, based on financial information up to 31 December 2014. The petitioner did not agree with the auditor’s valuation for various reasons, including that the auditor had used out-of-date financial information. As a result, the exit did not take place and the petitioner continued as a shareholder despite expressing a continuing desire to exit.

The petitioner complained that he had suffered unfair prejudice as a result of the way the company had been managed in various respects, both before and after he had decided to exit, as well as due to the way the auditor had valued his shares.

The court found that the petitioner had suffered prejudice due to mismanagement of the company. However, that prejudice was not unfair, because the shareholders’ agreement contained a mechanism enabling the petitioner to exit the company in a way that gave credit for any prejudice he had suffered.

Furthermore, once he had notified his intention to exit the company, any mismanagement after that date could not affect the value of his shareholding at the date of his intended exit.

The court did find that the petitioner had suffered unfair prejudice as a result of the auditor using out-of-date financial information during the valuation. However, the only relief the court was prepared to grant was an order to revalue the shares using more up-to-date information.

Read our in-depth piece on the court’s decision on unfair prejudice in the context of a valuation of shares on an exit

Government reverses changes to financial promotion exemptions

The Government has published new legislation that reverses certain changes to the UK’s regime regulating financial promotions that took effect at the start of 2024.

Under UK law, it is a criminal offence to communicate a financial promotion unless the person doing so has been authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority or the contents of the promotion have been approved by an FCA-authorised person.

Financial promotions occur in various forms, including where a company (or someone on its behalf) wishes to offer its shares to investors (whether to existing shareholders or prospective investors).

There are, however, numerous exemptions to the prohibition. This includes where the promotion is directed at high net worth (HNW) investors and/or sophisticated investors.

Following a public consultation in 2021, the Government published legislation in December 2023 amending the regime, including to extend the scope of these exemptions as follows.

• The thresholds for qualifying as a high net worth investor were raised from £100,000 of annual income to £170,000, and from £250,000 of net assets (excluding main home and pension assets) to £430,000.
• The ability to qualify as a sophisticated investor by virtue of having been a company director for two years was expanded so that it applied to companies with turnover of at least £1.6m (raised from £1m).
• The ability to qualify as a sophisticated investor by virtue of investing in more than one unlisted company in the previous two years was removed.

These changes took effect from 1 January 2024.

The new legislation reverses these changes and restores the position as it stood before 2024. However, it preserves other changes, including the new form of confirmation that a person will need to give to qualify as a high net worth or sophisticated investor.

The reversal takes effect from 27 March 2024. However, it states that investor confirmations prepared under the existing regime will remain valid until 30 January 2025.

Access the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment and Transitional Provision) Order 2024

FCA releases further draft rules for reformed listing regime

The Financial Conduct Authority (FCA) has published an updated draft instrument, which contains further draft new rules setting out the FCA’s proposed new regime for listing securities in the UK.

The FCA published an initial draft instrument in December 2023, alongside its consultation paper on the proposed new regime (CP23/31). That instrument contained what the FCA termed “tranche 1” of the proposed reforms, with further reforms (“tranche 2”) to follow.

You can read our previous Corporate Law Update for more information on the FCA’s consultation on a reformed listing regime.

The updated instrument now contains both tranche 1 and tranche 2 reforms and forms the complete instrument to accompany the consultation.

In particular, the instrument contains proposed wording for tranche 2 reforms concerning dealing with the FCA and publishing information, listing principles for all issuers, the process for obtaining a listing, and rules for sovereign-controlled companies, closed-ended investment funds, shell companies (including special purpose acquisition companies, or SPACs), and issuers of global depositary receipts (GDRs) and non-equity securities.

The consultation remains open for comments on the FCA’s proposals generally and the draft rules for tranche 1 until 22 March 2024. However, the FCA will accept comments on the draft rules for tranche 2 until 2 April 2024.

Access the FCA’s consultation (CP23/31) on a reformed securities listing regime for the UK

Access the updated FCA instrument setting out draft new rules for a reformed listing regime (PDF)

Parker Review publishes update on progress towards senior management ethnic diversity

The Parker Review Committee, led by Sir John Parker, has published a new update report on progress towards improving ethnic diversity among the senior management of UK companies.

The Committee was established in 2015 to conduct an official review into levels of ethnic diversity on UK company boards. In 2017, it published a report setting out various recommendations for FTSE 100 and 250 companies. In 2023, it updated its recommendations to expand diversity targets to senior management more widely and to bring large UK private companies within scope.

The recommendations now include the following.

• There should be at least one ethnic minority director on each FTSE 100, FTSE 250 and large private company board by 2021, 2024 and 2027 respectively.
• FTSE 350 companies should set a target by December 2023, to be achieved by December 2027, for senior management who self-identify as being in an ethnic minority.
• Companies should develop mechanisms to identify, develop and promote people from ethnic minorities and set objectives for pipeline development.
• A company’s annual report should describe its policy on ethnic diversity. Companies that do not meet recommendations by the relevant date should explain why in their annual report.

The latest report sets out progress made against the recommendations as at December 2023, based on a census of all FTSE 350 boards and 50 large private companies. It notes the following key points.

• At least one ethnic minority director. 96% of FTSE 100 companies have met this target (the deadline for which was 2021). With one year to go, 70% of FTSE 250 companies have met the target (60% in 2022). With four years to go, 44% of private companies surveyed have hit the target.
• Ethnic minority representation on boards. Ethnic minorities accounted for 19% of FTSE 100 directorships (18% in 2022), 13.5% of FTSE 350 directorships (11% in 2022) and 11% of private company directorships.
• Ethnic minority representation in senior management. Ethnic minorities represented 13% of wider senior management in FTSE 100 companies and 12% in FTSE 250 companies. The Parker Review has left companies to set their own targets for this metric, but the average target set by companies was 17% for the FTSE 100 and 15.5% for the FTSE 250.

Read the Parker Review report on ethnic diversity in public and large private company senior management (opens PDF)

Treasury consults on measures to improve UK’s anti-money laundering regime

HM Treasury (HMT) is consulting on proposed measures to improve the effectiveness of the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) regime.

The existing regime, which is set out in the Money Laundering Regulations 2017, requires certain firms (including financial institutions, law firms and accounting firms) to carry out customer due diligence (CDD) at certain points, most notably when taking on a new client.

In some cases, where there is a higher risk of money laundering, firms must also carry out checks to identify the source of any funds being transferred as part of a transaction or carry out enhanced due diligence (EDD).

The consultation also asks for views on proposed changes to the UK’s Trust Registration Service (TRS), under which trusts that need to pay certain taxes in the UK, as well as certain non-taxable trusts, are required to register with and provide details to HM Revenue & Customs (HMRC).

The consultation asks for views on several topics, including the following.

• Customer due diligence by non-financial firms. Whether the “trigger points” for conducting CDD are sufficiently clear and whether there is a need for further clarity on when to carry out “source of funds” checks.
• Digital identity verification. Potential guidance to assist firms conducting CDD with verifying a person’s identity electronically using digital identity verification solutions.
• Enhanced due diligence. Whether the current risk factors for EDD are appropriate, whether any other risk factors should be provided, and whether a firm should automatically be required to conduct EDD on a “complex or unusually large” transaction.
• High-risk third countries. Whether to give firms more flexibility to apply a risk-based approach when applying EDD on customers located in a high-risk third country, or not to apply EDD at all.
• Simplified due diligence. Whether to include further statutory risk factors that indicate a lower risk of money laundering in an attempt to encourage greater take-up of simplified CDD.
• Shelf companies. Potentially expanding the regime to include the sale of pre-registered “shelf companies” (which, unlike the formation of new companies, is not currently regulated).
• Trust Registration Service. Requiring all non-UK express trusts that own UK land to register (and not only those that acquired UK land on or after 6 October 2020) and expanding access to information held on these trusts, as well as exempting certain “low value” trusts from registration.

HMT has asked for responses by 9 June 2024.

Read HM Treasury’s consultation on improving the effectiveness of the UK’s anti-money laundering regime (opens PDF)