Corporate law update: 11 - 17 June 2022

In this week’s update: a requirement for written notice of termination did not prevent implied novation, a Takeover Panel statement on purchases during an offer period, a report on how the UK’s national security regime is working and the Law Commission sets out options for reforming corporate criminal liability.

• A requirement for written notice of termination did not prevent implied novation of a contract
• The Takeover Panel publishes a new practice statement on purchases during an offer period
• The Government publishes a report on how the UK's national security regime is working
• The Law Commission publishes its options for reforming corporate criminal liability in the UK

Requirement for written notice of termination did not prevent implied novation

The court has found that a clause in a contract requiring written notice to terminate the contract did not prevent the parties from novating it informally without following the termination procedure.

The judgment also discusses whether and when it is reasonable to withhold consent to the assignment of a contract. We will explore this part of the judgment in more detail next week.

What happened?

Gama Aviation (UK) Ltd v MWWMMWM Ltd [2022] EWHC 1191 (Comm) concerned an aircraft support services agreement, under which a company known as International Jetclub provided certain support services to the owner of an aircraft (the "Owner").

In 2017, Gama Aviation acquired International Jetclub's holding company, with the result that International Jetclub became an indirect subsidiary of Gama Aviation (UK) Limited ("Gama UK").

This was followed by a group rationalisation designed to consolidate all the expanded Gama Aviation group's regulatory licences into Gama UK. Gama Aviation argued that, as part of this rationalisation, the aircraft support services agreement was novated, by implication, to Gama UK.

Following the rationalisation, Gama UK continued to provide the support services previously provided by International Jetclub, and the Owner began to pay Gama UK instead of International Jetclub and to request additional services from Gama UK.

In 2019, the Owner stopped making payments to Gama UK. In 2020, Gama UK sued for payment.

In response, the Owner claimed (among other things) that the alleged novation had been ineffective. It noted that the contract contained a clause as follows:

The Owner argued that, due to this clause, it was not possible to terminate the support services contract without a written notice. That had not happened. As a result, the Owner argued, the original contract had not been terminated and, because terminating the existing contract was part of the mechanism of a novation, the novation had not been effective.

What did the court say?

The court disagreed and found that the contract had been novated.

The judge had to grapple with a difficult issue. As a general rule, if the parties to a contract agree that the contract may be varied or terminated only by written agreement, they will be held to this, and any purported variation or termination agreed orally or by conduct will be ineffective. This was the upshot of the Supreme Court's recent case in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 (see our previous Corporate Law Update).

That rule is not rigid. If the parties do agree a variation or termination orally or by conduct, and then one of them relies on that agreement to their detriment, the court may refuse to strike the amendment or termination out on the basis of the doctrine of "estoppel". But this will always depend on the facts.

The judge found that the Owner had been well aware of the arrangements for Gama UK to take the contract over from International Jetclub. Its conduct (in particular, by paying Gama UK and asking for additional services) showed it had consented to the transfer.

The judge considered the clause cited above and found that it could carry one of two meanings:

• It could amount to an "exclusive code" for terminating the contract, requiring any kind of termination to be in writing. In this case, it would have prevented the alleged novation, because the novation was not made in writing.
• Alternatively, it could be dealing with a situation where one party wished to terminate the contract unilaterally, rather than where International Jetclub and the Owner agreed mutually to terminate. In this case, it would not have prevented the alleged novation, because it was clear that the Owner had agreed to the novation and so termination was not unilateral.

The judge preferred the second interpretation, noting that it made little sense for the parties to agree to hold themselves to a three-month notice period to terminate the contract where they both wanted to terminate earlier than that.

As a result, the contract did not prevent a consensual novation by conduct.

Even if that was wrong, the judge decided that the doctrine of estoppel applied. The Owner had acted as if the novation were valid and International Jetclub had relied on that. The Owner could not deny the novation later merely because it had not been in writing.

What does this mean for me?

The Supreme Court's decision in Rock Advertising placed added emphasis on the need for parties to follow any specific procedures they have agreed when amending or terminating a contract. Failure to do so is likely to introduce uncertainty and generate disputes, and any purported amendment or termination may well simply be void.

At the time, the Supreme Court noted that this strict approach could lead to injustice and suggested that estoppel could come to the rescue. It appears we have now seen that suggestion borne out. However, estoppel is a fragile defence and will not always apply, as it depends heavily on the facts.

Ultimately, the judgment reinforces the decision in Rock Advertising and the practical points that arise out of that judgment.

Takeover Panel publishes new practice statement on purchases during an offer period

The Takeover Panel has published a new Practice Statement 33, which covers situations where a bidder (an "offeror") acquires shares in a target company (an "offeree company") during an offer period.

The Practice Statement sets out the way in which the Panel will interpret and apply the provisions of the UK's Takeover Code in these circumstances. It will therefore be of interest to any organisation that has made, or is considering making, an offer for a UK public company and is considering undertaking a stakebuilding exercise.

The key points arising out of the Panel Statement are as follows.

• If an offeror intends to purchase shares in an offeree company during an offer period, it should consult the Panel Executive in advance.
• If an offeror uses a financial services firm (a broker) to purchase shares in an offeree company on its behalf, those shares must be attributed to a specific trade with a shareholder in the offeree company or market counterparty. Moreover, the broker must attribute the shares to the offeror when it acquires them (and not when it books them out to the offeror, if it has "warehoused" them).
• The Statement sets out circumstances when the Panel will grant a waiver of the general rule that an offeror may not purchase shares in an offeree company from an exempt principal trader in the same group as an adviser that is connected with the offeror.
• If an offeror or its broker proposes to approach several shareholders confidentially to reach agreement with them at the same time to purchase a minimum number of shares (a so-called "all or none" or "kill or fill" order), it should consult the Panel Executive in advance. This is to ensure an offeror does not indicate that it will be improving its offer without formally committing to do so.
• If an offeror intends to acquire shares in an offeree company by purchasing contracts for difference (CFDs), total return swaps (TRSs) or other derivatives, it should consult the Panel Executive in good time before doing so.
• If the offeror is a consortium and is not purchasing shares in the offeree company through a bidco, the Panel Executive should be consulted in good time to ensure that (as required by the Takeover Code) the purchases are proportionate to the consortium members' interests in the consortium or there is an arrangement which gives no profit to the party making the purchase.
• An offeror may acquire sufficient shares to satisfy its "acceptance condition", but on standard T+2 settlement terms. Under Rule 8.1 of the Takeover Code, the offeror must announce the purchase by 12 noon on the next business day. However, the offeror will not become the registered shareholder, and so will not satisfy the acceptance condition, until two business days after dealing.
  
  In these circumstances, the Panel expects the offeror to make a separate announcement at the time of purchase setting out all of the purchases that have not yet settled. The Panel Executive should be consulted before the announcement is published.
• If an offeror purchases shares in an offeree company, the Panel's Market Surveillance Unit should be provided with a spreadsheet at the end of the trading day containing details of the seller, the number of shares purchased and the price paid to the seller.

Separately, the Panel has published Panel Bulletin 4, which sets out how to calculate the value of an offer when working out a document charge that is referable to the offer value.

Finally, the Panel has announced that it has published an updated version of the Takeover Code, which incorporates amendments made by four recent Panel Instruments.

Government publishes report on how UK's national security regime is working

The Government has published its first annual report on how the UK's new national security screening regime is working in practice. The report covers the period from 4 January 2022 (when the regime came into force) to 31 March 2022.

By way of reminder, under the regime, the UK Government, acting through its Investment Security Unit, has the power to call in certain kinds of investment and acquisition for review if it perceives a risk to the UK's national security. Following review, the Government can clear an acquisition to proceed, impose conditions on it or block it entirely.

If a transaction involves the acquisition of shares or securities in an entity that operates in one of 17 specified sectors, the acquirer must notify the Government before completing the acquisition. This is designed to ensure that the Government is made aware of proposed acquisition in industries that are perceived to pose the highest risk to national security. In other circumstances, notification is voluntary.

For more information on how the regime operates, see our previous Corporate Law Update (prepared before the regime came into effect).

The key points from the report are set out below and relate to the period covered by the report.

• The Government received 222 notifications, comprising 196 mandatory notifications, 25 voluntary notifications and 1 application for retrospective validation. This is slightly below the number of notifications the Government originally estimated it would receive.
• The number of notifications was slightly lower than the number of acquisitions, because, in some cases, the Government accepted a single notification for multiple linked qualifying acquisitions.
• Most notifications were accepted. The Government rejected 7 mandatory notifications and 1 voluntary notification. This includes mandatory notifications that should have been voluntary notifications, as well as notifications that did not contain sufficient information.
• Generally, the Government responded to a notification within 3 to 5 working days, although this varies depending on the type of notification (voluntary or mandatory) and whether the Government accepted or rejected the notification.
• Of these notifications, the Government called in 17 transactions for review, 13 following mandatory notifications and four following voluntary notifications (again, fewer than the Government originally estimated). This suggests that, as at 31 March 2022, the Government had not called in any acquisitions that were not notified to it.
• Generally, the Government took between 22 and 24 working days to call a transaction in (where it decided to do so). The quickest call-in came after 11 working days and the longest after 30 working days. The statutory time limit for calling in a transaction is 30 working days; the Government stayed within this limit for every transaction called in.
• The sectors in which mandatory notifications were made most frequently included defence (33%), military and dual-use products (21%), critical suppliers to Government (20%), artificial intelligence (19%) and data infrastructure (17%).
• The sectors in which voluntary notifications were made most frequently included professional, scientific and technical activities (17.5%), data infrastructure (also 17.5%), and "other service activities", energy and computing hardware (each at 13%).
• The sectors in which transactions were called in most frequently included military and dual-use products (41%), defence (35%) and critical suppliers to Government (also 35%).
• After calling a transaction in, the Government has 30 working days to reach a decision. It can extend this period by a further 45 working days without the consent of the transaction parties. As at 31 March 2022, the Government had not exercised its power to extend the call-in review period. However, given that the regime only came into force on 4 January 2022, there are likely to be very few, if any, transactions in respect of which the Government will have needed to extend the period.
• Of these 17 transactions that were called in, 3 transactions were cleared. The remaining 14 were still undergoing assessment as at 31 March 2022. On average, the Government took 24 working days to clear a transaction from the date of the initial notification.
• The Government has so far not issued any penalties for infringements of the regime.

Law Commission sets out options for reforming corporate criminal liability

The Law Commission has published its options paper for reforming corporate criminal liability in the UK. The report sets out ten options for the UK Government to consider in trying to ensure that corporations are effectively held to account for committing serious crimes.

Options range from keeping the current system (which relies on the so-called "identification principle"), through criminalising conduct where senior management have been complicit, to introducing a series of "failure to prevent" offences modelled on those that currently apply in relation to bribery and facilitating tax evasion.

For more information on the report, read this blog by our colleagues Neill Blundell, Helen Harvey and Max Hobbs.