• An automatic share conversion under a company’s articles was ineffective because class consent was not obtained
• EU’s Foreign Subsidies Regulation notification regime goes live
• The Government confirms it intends to extend the UK’s invoice payment practice reporting regime
• The European Union is consulting on shortening the settlement cycle for securities on EU markets
• The Transition Plan Taskforce publishes its final disclosure framework for private sector net zero transition plans
• The Green Technical Advisory Group publishes a report on responsibility for the UK’s forthcoming green taxonomy
• The Takeover Panel launches a new digital version of the Takeover Code

Conversion from preference to ordinary shares was invalid

The Court of Appeal has confirmed that a conversion of preference shares into ordinary shares was invalid because it amounted to a variation of class rights that had not been properly approved.

DnaNudge Ltd v Ventura Capital GP Ltd [2023] EWCA Civ 1142 concerned a medical and health technology company that was partly financed by venture capital.

The company issued preferred shares to two investors, raising a total of £44m. The preferred shares carried the same rights as the existing ordinary shares in the company, except that the preferred shares carried a right to a cumulative preferred return on any dividend or capital distribution.

The company’s articles of association allowed an Investor Majority to convert the preferred shares into ordinary shares by sending written notice to the company.

The articles defined an “Investor Majority” as “the holders of a majority of the [preferred shares] and [ordinary shares] in aggregate as if such [shares] constituted one class of share”. The ordinary shares accounted for 86.7% of the company’s shares, meaning that the ordinary shareholders had the power to form an Investor Majority without the preferred shareholders.

Finally, the articles also stated that any variation or abrogation of the rights attaching to any class of shares required the consent in writing of the holders of more than 75% in nominal value of the issued shares of that class.

Ordinary shareholders served notice on the company purporting to convert the preferred shares into ordinary shares. The preferred shareholders objected, claiming that the conversion amounted to a variation of class rights and was invalid because no consent had been obtained under the articles.

The ordinary shareholders claimed that there had been no variation of class rights, because the articles stated that conversion was to be “automatic” on service of the relevant notice. This, they claimed, left no room for conversion to be conditional on obtaining class consent.

In the initial proceedings (Ventura Capital GP Ltd v DnaNudge Ltd [2023] EWHC 437 (Ch)), the High Court decided that the conversion did amount to a variation of the rights of the preferred shares.

It said there was an incompatibility between the conversion mechanism and the requirement for class consent. It resolved that ambiguity by making the conversion conditional on obtaining class consent. Because that consent had not been obtained, the variation was ineffective and void.

The company appealed. The Court of Appeal has now dismissed the appeal, essentially upholding the High Court’s reasoning.

The decision again shows the need for careful drafting when including conversion and class rights provisions in a company’s articles.

Read more about the decision on converting preference shares, as well as points to consider, in our previous in-depth article

Access the original High Court decision in Ventura Capital GP Ltd v DnaNudge Ltd [2023]

Access the Court of Appeal’s decision in DnaNudge Ltd v VenturaCapital GP Ltd

EU’s Foreign Subsidies Regulation notification regime goes live

The notification obligations under the European Union’s new Foreign Subsidies Regulation (the FSR) have gone live.

Businesses will now have to notify qualifying transactions and public procurement procedures to the European Commission.

The FSR gives the European Commission a suite of new powers to tackle subsidies from non-EU countries. This will complement the EU’s existing state aid powers, which address governmental support by EU member states.

The FSR introduces a system of mandatory pre-closing notification and review for any merger, acquisition or new joint venture if:

• at least one of the merging parties, the target or joint venture is established in the EU and has an EU turnover of at least €500m; and
• the companies involved in the transaction received aggregate foreign financial contributions of more than €50m from non-EU countries in the three years prior to notification.

Read more about notifying under the FSR in this separate in-depth piece by our colleagues

Payment practices reporting requirements to be extended

The Government has announced that it intends to extend the current regime under which businesses report on their invoice payment practices.

Under the current regime, large UK companies and limited liability partnerships (LLPs) must publish a half-yearly report setting out their practice for paying supplier invoices, as well as statistics for their actual performance in paying invoices over the preceding year.

This includes the number of invoices paid within specified time periods.

The current regime is due to expire on 6 April 2024.

The Government has confirmed that it intends to extend the regime beyond its expiry date. It also intends to require businesses to report not only on the total number of invoices paid during the specific time period, but also on the total value of payments made during those periods. It will also introduce a requirement to report on the volume of disputed invoices.

The changes will be made alongside other measures, including broadening the powers of the Small Business Commissioner, which are designed to eliminate “barriers to growth” for small and medium-size enterprises (SMEs) caused by late payment of invoices.

Read the Government’s announcement on extending invoice payment practice reporting

EU consults on shortening securities settlement cycle

The European Securities and Markets Authority (ESMA) has issued a call for evidence on potentially shortening the settlement cycle for securities on the European Union’s capital markets.

A transaction in securities on a capital market involves two stages: the order, in which parties commit to the trade, and settlement, in which payment is made and the security formally transferred.

Settlement on most markets typically occurs on a T+2 basis. This means that settlement occurs two business days after the relevant order is made.

Under the EU Central Securities Depositaries Regulation (CSDR), all transactions in transferable securities on EU markets must be settled on a T+2 basis or shorter.

ESMA is asking for views on whether to amend the CSDR to mandate settlement on a T+1 basis (where settlement occurs the following business day) or a T+0 basis (where settlement occurs on the same day).

The call for evidence follows the decision by the US Securities and Exchange Commission in February 2023 to move settlement in securities on US capital markets to a T+1 basis. ESMA is also asking for views on the impact of the SEC’s decision on EU capital market participants.

The gap between order and settlement is used for various post-trade processes, including (where necessary) entering into FX transactions. As those transactions will have their own settlement cycles and may involve parties in multiple time zones, a key consideration for any move to T+1 or T+0 will be how to accommodate settlement of both FX and security trades in a coherent manner.

ESMA has asked for responses by 15 December 2023.

Read ESMA’s announcement on proposals to shorten the EU securities settlement cycle

Read ESMA’s call for evidence on shortening the EU securities settlement cycle

Read the SEC’s announcement on shortening the US securities settlement cycle

TPT publishes final private sector net zero transition plan disclosure framework

The Transition Plan Taskforce (TPT) has published its final disclosure framework for UK private sector entities transitioning to a low-carbon economy.

The TPT (a unit within HM Treasury) was launched in 2022 to develop a “gold standard” for UK climate transition plans. The final framework follows the TPT’s consultation last year on a draft framework.

The disclosure framework makes recommendations for companies and financial institutions to develop “gold-standard” transition plans. It explicitly builds on IFRS S2, the second sustainability disclosure standard issued by the new International Sustainability Standards Board (ISSB), which sets out climate disclosures for companies.

The framework also draws on the framework and guidance produced by the Glasgow Financial Alliance for Net Zero (GFANZ) in order to create maximum alignment.

The framework operates on three core principles of ambition, action and accountability.

Within these core principles, the framework places disclosures within five key elements – foundation, implementation strategy, engagement strategy, metrics and targets, and governance – which together comprise 19 sub-elements.

Alongside the framework, the intention is for separate implementation guidance to set out the steps firms can take to develop a transition plan and disclose it. The guidance will also be accompanied by a technical annex that maps the TPT’s recommendations to wider corporate reporting standards, such as the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and the standards of the International Sustainability Standards Board (ISSB).

The TPT intends to consult on this detailed sector-specific guidance in November 2023 and to publish final detailed sector guidance in early 2024.

Read the Transition Plan Taskforce’s final disclosure framework for private sector entities (PDF)

Read the summary of the Transition Plan Taskforce’s final disclosure recommendations (PDF)

Access the Transition Plan Taskforce’s Disclosure Framework landing page

Final report on UK’s green taxonomy published

The Green Technical Advisory Group (GTAG) has published a report on options for creating an “institutional home” for the UK’s new green taxonomy.

The UK Government has committed to providing a new green taxonomy for the UK. That taxonomy will feed into various types of reporting, including reporting by businesses on environmental and sustainability-related matters.

The purpose of the report is to explore who should have ultimate responsibility for that taxonomy.

The GTAG recommends creating an “advisory body” in the short term to develop and implement the new green taxonomy.

Alongside this, the GTAG recommends that the Government legislate to place responsibility for the taxonomy in the medium to longer terms on a specific public body. For this purpose, the GTAG identifies the Financial Reporting Council (FRC) and its prospective successor, the Audit, Reporting and Governance Authority (ARGA), as the most suitable candidate.

Read the Green Technical Advisory Group’s report on an institutional home for the UK Green Taxonomy

New digital Takeover Code launched

The Takeover Panel has launched a new, digital version of the Takeover Code.

The Code (formally called the City Code on Takeovers and Mergers) governs takeovers and mergers of public companies that have their registered office in the UK, the Channel Islands or the Isle of Man and whose securities are admitted to a securities exchange in any of those jurisdictions. It also applies to certain non-publicly traded companies that have their registered office in any of those jurisdictions.

The new digital version of the Code follows a similar format to the Financial Conduct Authority’s online Handbook, including pop-up boxes for defined terms. It also includes links to Takeover Panel Practice Statements from relevant rules of the Code.

The Code remains available in PDF format from the Panel’s website. The Panel has also confirmed that it will continue to provide printed copies of the Code to subscribers for the foreseeable future.

Access the new digital Takeover Code