Corporate Law Update

This week:

• The NEX Growth Exchange joins AIM as a designated SME Growth Market
• The High Court refuses to approve a cross-border merger due to a problem at the pre-merger certificate stage
• A letter of intent from one company to another amounted to a contract to provide services and included a limit on one party’s liability
• A few other items of interest

NEX Growth joins AIM as an “SME Growth Market”

NEX Exchange has announced that the NEX Exchange Growth Market has been designated an “SME Growth Market”. At the same time, NEX Exchange has published a consultation on various changes to its Growth Market Rules for Issuers to reflect the change.

The designation follows the London Stock Exchange’s successful application for AIM to be designated an SME Growth Market in January 2018.

The designations will allow AIM and NEX Growth issuers and applicants to benefit from reduced administrative requirements. In particular, SME Growth Market issuers do not need to keep an insider list under the EU Market Abuse Regulation (MAR) or document their reasons for delaying the disclosure of inside information, and they have longer to publish details of transactions in their securities by their executives and other managers.

In addition, in principle, AIM and NEX Growth companies who are seeking a listing on an EU regulated market will be able to produce a simplified prospectus if their securities have been admitted to AIM or NEX Growth for at least three years. However, how this will function precisely in practice depends in large part on how the UK implements the EU prospectus regime following Brexit.

Court could not approve cross-border merger due to problem at pre-certification phase

The High Court has refused to approve two linked and consecutive cross-border mergers because there was a defect at the pre-merger certificate stage for one of the transferor companies.

What happened?

Re MDNX Group Holdings Limited and others concerned two linked cross-border mergers (CBMs) under the Companies (Cross-Border Mergers) Regulations 2007.

In the first CBM, one Dutch, one Scottish and five English wholly-owned subsidiaries would merge into their English parent company, MDNX Group Holdings Ltd (MDNX), through a merger by way of absorption.

In the second CBM, MDNX would merge into its sister company, Interoute Networks Ltd (Interoute), as would three other English companies and a Dutch company, again through a merger by way of absorption.
Following the second merger, Interoute would continue the business carried on by all of the transferor companies.

To complete the mergers, among other things, the English High Court needed to issue a pre-merger certificate for the English companies, and the Scottish Court of Session needed to do the same for the Scottish company as part of the first CBM. The certificates take the form of orders stating that all of the pre-merger acts and formalities have been complied with. Following this, the English High Court would also need to grant a final order giving effect to the CBMs.

The companies applied for the pre-merger certificates for the first CBM. However, the companies had failed to send details of the date, time and place of the shareholder meetings required by the Regulations. The High Court did not spot this omission and granted pre-merger certificates for the English company. The Court of Session did spot the error, however, and granted an order stating that the pre-merger acts and formalities had been complied with, except for this particular failure.

What did the Court say?

At the hearing to seek final approval for the first CBM, the High Court said that the orders issued by the High Court amounted to valid pre-merger certificates, even though not all of the formalities had in fact been complied with. (This was a similar situation to that in Re M2 Property Invest Limited, on which we reported in January last year. In that case, a Polish Court had granted a pre-merger certificate despite having been given incorrect information about a Polish company’s financial standing. Nevertheless, the English Court approved the transfer, saying it could not re-evaluate the Polish Court’s decision.)

However, the High Court said that the Scottish order did not amount to a pre-merger certificate, because it did not confirm that all of the pre-merger acts and certificates had been completed. Indeed, it noted specifically that two specific requirements had not been completed. The High Court was not, therefore, able to approve the first CBM.

Contract based on letter of intent did include limit on liability

In November 2016, we reported on a case (Arcadis Consulting (UK) Limited v AMEC (BSC) Limited) in which the High Court found that two companies – Arcadis and AMEC – entered into a design services contract off the back of a letter of intent for a parallel project. The contract was formed when Arcadis (known at the time as Hyder) started performing work for AMEC.

However, the judge said that, at the point at which Arcadis starting performing work, the two parties had not yet finalised certain terms and conditions of the contract, including a limit on Arcadis’ liability under the contract. He said that Arcadis had not expressly agreed to those terms and conditions and, as a result, the proposed limit on liability was never incorporated into the contract.

Arcadis appealed the High Court decision, and the Court of Appeal has delivered its judgment. The Court of Appeal agreed with the High Court judge that a contract had been formed on the basis of the letter of intent between Arcadis and AMEC. This was because the letter of intent amounted to an offer by AMEC, which Arcadis accepted either in correspondence (albeit not in clear language) or by starting work on the project.

However, the Court of Appeal said that the original trial judge was wrong to find that Arcadis had accepted only some of the original letter of intent, and not the terms and conditions that included the limit on liability. There was no evidence of this and, although Arcadis’ acceptance was not explicit, it did not make sense to say that Arcadis accepted part of the offer in AMEC’s letter of intent, and not all of it.

The upshot is that the limit on Arcadis’ liability was incorporated into the contract after all.

Like the original trial judgment, this decision on appeal illustrates the risks of beginning work on the basis of a mere term sheet or letter of intent or mere correspondence, before final terms and conditions are finalised. This is true for any condition of the contract, but particularly key terms such as limits on liability, indemnities and stipulations as to price.

Other items

• Private equity and venture capital valuations. An updated version of the International Private Equity and Venture Capital Valuation Guidelines (the IPEV Guidelines) has been published. The IPEV Guidelines set out recommendations for best practice when valuing private capital investments. The new 2018 guidelines, which replace the previous 2015 guidelines, now contain further guidance when valuing early-stage and debt investments, and remove the previous “Price of Recent Investment” valuation technique.
• Corporate reporting. The Financial Reporting Council (FRC) has published a list of companies whose annual reports and accounts it has reviewed in December 2018. The list indicates whether the FRC’s Corporate Reporting Review function conducted a full or limited review, and whether there was any exchange of correspondence with the relevant company.