• The Private Equity Reporting Group publishes its 16^th annual report on compliance with the Walker Guidelines
• The Financial Reporting Council publishes an updated version of the UK Corporate Governance Code
• Draft regulations are published to expand Companies House’s powers to remove confusing or misleading information from the public register
• The court permits a scheme of arrangement for a takeover to proceed even though the target’s shareholders included a sanctioned person
• A contractual clause was effective to limit a party’s liability for fraudulent breaches of contract committed after the contract had been formed

PERG publishes 16th annual report on Walker Guidelines compliance

The Private Equity Reporting Group (PERG) has published its 16th annual report on compliance with the Guidelines for Disclosure and Transparency in Private Equity (the Walker Guidelines).

The Guidelines are designed to assist private equity firms and their portfolio companies with improving transparency in financial and narrative reporting. They require portfolio companies to make certain disclosures in their annual report, publish their report and a mid-year update in a timely manner, and share certain data to gauge the contribution of UK private equity to the economy.

They also require private equity firms to make certain website disclosures.

The report assesses compliance with the Walker Guidelines during 2023. This year’s report covered 81 portfolio companies and 71 firms that backed them.

We have set out below the key points arising from the annual report in a separate in-depth piece.

Read about PERG’s 16^th annual report on private equity reporting in our separate in-depth piece.

FRC publishes updated UK Corporate Governance Code

The Financial Reporting Council (FRC) has published an updated version of its UK Corporate Governance Code.

The Code sets out principles of corporate governance for larger companies with a listing in the United Kingdom. It operates on a “comply or explain” basis: companies explain how they have applied the provisions of the Code, as well as any respects in which they have not applied the Code.

Strictly speaking, the Code is voluntary. However, under the Financial Conduct Authority’s Listing Rules, companies with a premium listing in the UK must apply the Code and explain any respects in which they deviate from it.

In addition, companies on the London Stock Exchange’s AIM market must adopt a corporate governance code and explain how they comply with that code. Several larger AIM companies choose to adopt the UK Corporate Governance Code.

The updated Code follows a consultation by the FRC in June 2023, in which the FRC proposed major changes. For more information, read our previous in-depth piece on proposed changes to the UK Corporate Governance Code.

However, following feedback to that consultation, the FRC announced in November 2023 that it would be proceeding with only a handful of changes to the Code, focussing in particular on strengthening internal controls within companies. For more information, read our previous Corporate Law Update on the FRC’s decision to make limited changes to the UK Corporate Governance Code.

The revised Code now incorporates those limited changes. The key changes are as follows.

• When reporting on governance, companies should focus on board decisions and their outcomes in the context of the company's strategy and objectives.
• Boards should not only assess and monitor the company’s culture but also how it has been embedded within the company.
• Board appointment and succession plans should promote diversity, inclusion and equal opportunity more generally (and not simply, as suggested in the current version of the Code, in relation to gender, social and ethnic background, and cognitive and personal strengths).
• Boards will be expected to establish and maintain the company’s risk management and internal control framework(s). This represents a shift of accountability towards the directors, whom the Code currently requires only to establish a risk management framework and “oversee” the company’s internal control framework.
• Audit committees should follow the new Audit Committees and External Audit Minimum Standard, published by the FRC in May 2023 (see link below). This incorporates several tasks allocated to the audit committee by the current Code, but also contains additional responsibilities.
• The obligation to describe the company’s risk management and internal control framework in the annual report has been expanded. The Code asks companies to describe how the board monitored and reviewed the effectiveness of the framework and to confirm how effective the company’s material controls were as at its balance sheet date.
• The board should state in all interim financial statements whether it considers it appropriate to adopt the “going concern” basis of accounting in preparing those statements. Currently, the Code requires this only for annual and half-yearly statements.
• Directors' contracts and remuneration arrangements themselves should include malus and clawback provisions, and not just remuneration schemes and policies. The company’s annual report should include a full description of malus and clawback provisions, including when they can be used, how long they last for and whether they were used over the preceding financial year.

The 2024 version of the Code applies to financial years beginning on or after 1 January 2025 (except for the changes to Provision 29, which apply to financial years beginning on or after 1 January 2026).

Access the 2024 version of the UK Corporate Governance Code (opens PDF)

Access the FRC’s Audit Committees and the External Audit: Minimum Standard (opens PDF)

Draft legislation published to increase powers to amend information at Companies House

Draft regulations have been published which, if made, will give the Registrar of Companies, acting through Companies House, greater powers to annotate or remove information held on the public register at Companies House.

The Registrar (Annotation, Removal and Disclosure Restrictions) Regulations 2024 would grant the powers in relation to companies and limited liability partnerships (LLP). The Register of Overseas Entities (Annotation and Removal) Regulations 2024 would grant similar powers in relation to overseas entities registered on the UK’s Register of Overseas Entities.

Both sets of regulations would implement new powers set out in the Economic Crime and Corporate Transparency Act 2023 (the ECCTA 2023).

Under the new powers, the Registrar would have the power to annotate information on the public register if they feel the information is misleading or confusing. The power is broad, and the Registrar can include any information appropriate to address the confusion.

The regulations also create a power for anyone to apply to Companies House to remove material from the public register. The applicant would need to explain why the material should be removed. If removing the material would have legal consequences, the applicant would need to explain why their interest outweighs that of anyone who may wish to inspect the material.

The ECCTA 2023 itself will give the Registrar the ability to remove material at their own initiative.

The new powers in the regulations are welcome. Currently, it can be difficult, and in some cases impossible, to remove incorrect or unnecessary information from the public register at Companies House. The new power to apply to remove material should greatly assist in expunging pointless, and at times misleading, material.

Access the draft Registrar (Annotation, Removal and Disclosure Restrictions) Regulations 2024

Access the draft Register of Overseas Entities (Annotation and Removal) Regulations 2024

Court gives green light to takeover involving sanctioned target shareholder

The High Court has ordered shareholder meetings to take place to approve the takeover of a publicly traded company and, in doing so, addressed the fact that one of the target company’s shareholders is subject to sanctions.

The takeover was structured as a statutory scheme of arrangement. Under this structure, the bidder acquires the target company’s shares if the transaction is approved in a meeting by a majority in number of the target’s shareholders who, collectively, hold at least 75% of the target’s shares by value.

Often, the target company’s shareholders will be separated into different classes according to how similar or different their rights are. If this happens, the approval requirements above must be satisfied in a separate meeting for each separate class.

In this case, one of the target company’s indirect shareholders was subject to an asset freeze under the UK’s Russia-related financial sanctions. As a result, it was doubtful whether he was permitted to vote his shares in the scheme, and it was clear that he could not transfer his shares to the bidder without a licence to do so from the UK Office of Financial Sanctions Implementation (OFSI).

To permit the scheme to proceed, the court ordered the meeting to take place but made the following stipulations:

• the chair of the meeting would be entitled to disallow any votes by the sanctioned shareholder if advised that it would be unlawful to cast those votes; and
• if the sanctioned shareholder’s shares were still frozen when the takeover took effect, they would instead transfer to the bidder when the asset freeze was lifted or, if earlier, when OFSI granted a licence for their transfer. If the shares were to be transferred under an OFSI licence before the asset freeze is lifted, the proceeds of sale would be placed in a frozen bank account.

The judgment briefly contemplates that the OFSI licence may never be granted and the asset freeze not lifted for a great deal of time. In this case, we can only assume that the shares would remain indefinitely with the sanctioned individual, leaving him a significant minority shareholder in the target.

The court also considered whether the sanctioned shareholder fell into a class all of his own for the purpose of the scheme. This was particularly relevant, given that he may not be able to vote his shares and may not receive any consideration for them any time soon.

It concluded, however, that he did not form his own class. Although affected differently by the transaction, his rights were sufficiently similar to those of the other shareholders. This is clearly sensible. If the sanctioned shareholder had formed his own class and been unable to vote, this presumably would have blocked the takeover entirely.

The judgment shows that the courts will continue to act pragmatically when reviewing and permitting a vote on a scheme of arrangement. However, it also shows the need to pay careful attention to a target company’s shareholder base. Sanctions, whether relating to persons connected with Russia or some other jurisdiction, can potentially pose difficulties for a successful takeover.

Access the court’s decision on a takeover involving a sanctioned person (In the matter of Velocys plc [2024] EWHC 28 (Ch))

Contractual clause limiting liability for fraud was effective

The High Court has held that a contractual clause that purported to limit liability for breaches of contract was effective to limit liability for dishonesty (i.e. fraud).

What happened?

Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corp. [2024] EWHC 35 (TCC) concerned a contract between Innovate, a company formed to develop the patent to a form of liquid aspirin, and the University of Portsmouth.

Under the contract, the University would conduct early-stage trials to determine whether a drug patented by Innovate might be effective to treat a particular type of brain tumour. The tests were performed by individuals in the University’s School of Pharmacy and Biomedical Sciences.

In accordance with academic practice, those individuals then published their conclusions in a scientific journal. Subsequently, participants of PubPeer, an online discussion forum for academic publications, noted certain discrepancies in the published results.

Innovate alleged that these discrepancies arose from deliberate and dishonest manipulation by a member of the research team. It said that, even if that individual had not intentionally misrepresented test results, he had been so reckless as to their accuracy that his actions amounted to fraud.

Innovate therefore claimed against the University for breach of contract.

The University relied on two clauses in the contract which, it argued, limited its liability for any breach of contract. These clauses stated as follows.

“11.4  Except as provided in clause 11.5 the University is not liable to the Funders because of any representation (unless fraudulent), or any warranty (express or implied), condition or other term, or any duty at common law, non-observance or non-performance of this Agreement […]

11.5  The liability of a Party to another howsoever arising (including negligence) in respect of or attributable to any breach, non-observance or non-performance of this Agreement or any error or omission (except in the case of death or personal injury or fraudulent misrepresentation) shall be limited to £1m.”

Innovate said these clauses did not exclude liability for the alleged breaches because it was not possible under English law to exclude liability for fraud or dishonesty. It also said the limitations were unenforceable under the Unfair Contract Terms Act 1977 (UCTA) because they were unreasonable.

What did the court say?

The court disagreed.

The judge acknowledged that, as a matter of English law, a party cannot exclude liability for their own fraud or dishonesty in connection with the formation of a contract. This includes liability for fraudulent misrepresentation (not relevant to this case), but also any other fraud at the outset of a contract.

But the position was not the same in relation to fraud or wilful default in connection with the performance of a contract (i.e. after a contract has been made), as was the case here. In particular, the court said there was no reason a party cannot exclude or limit liability for fraudulent or dishonest actions by one of the party’s employees or agents when performing a contract.

In this case, the limitation clauses expressly stated that they did not apply to “fraudulent misrepresentation”, but they did not expressly mention fraudulent or dishonest breach of contract when performing the contract. Naturally read, the limitations therefore covered fraudulent breaches.

The court dismissed the argument that the clauses were unreasonable under UCTA. They had appeared in a contract negotiated by sophisticated counterparties, with the benefit of legal advice, and the commercial context (including the low sum payable to the University) justified their inclusion.

What does this mean for me?

It is important not to extrapolate too much from this judgment.

The decision confirms that a contract party can, in principle, limit liability for breach of contract arising from fraud or dishonesty by an employee or agent. In a business/B2B context, if the contract is subject to UCTA, the limitation will need to be reasonable. (In a consumer/B2C context, it is unlikely that such a limitation will ever be reasonable and enforceable.)

It is less clear whether a party can limit or exclude liability for their own dishonest or fraudulent breach of contract, although the decision suggests that, in theory, this is possible.

But how effective such a limitation is will depend on the nature of the fraud. It remains impermissible under English law to intentionally or recklessly mislead someone into entering into a contract. Any attempt to limit liability for this will be void.

In the context of an investment or business acquisition, this means a party cannot exclude liability for:

• any fraudulent misrepresentations given before the documentation is signed; or
• any contractual warranties given when the transaction documentation is entered into if the party knew, or was reckless as to whether, they were untrue at that time.

Contractual warranties are sometimes repeated, either when a transaction completes (if this does not happen when the documentation is signed) or on a periodic basis. These are known as “repeated warranties”. Conceivably, the case suggests that it might be possible to exclude liability for dishonest or intentional actions that result in a warranty becoming untrue when repeated.

In practice, however, it is common to agree in transaction documentation that any limitations will not apply to fraud, dishonesty or wilful default by a party to the contract, whether before or after the contract is form. Indeed, if the transaction is to be underwritten using warranty and indemnity (W&I) insurance, an insurer will insist on this. The point will, therefore, usually be moot.

In other contexts, such as equity investments and joint ventures, commercial parties will need to consider their ongoing obligations under the relevant contractual documentation and whether they intend to limit liability for any dishonest breaches during the lifetime of the arrangement. This may include where parties have agreed to supply information or keep it confidential, provide co-operation in certain circumstances, vote or not vote in a particular way, or abstain from competing.

Whatever the context, the decision shows the importance of scrutinising limitation clauses carefully to ensure they provide the level of coverage each party is expecting.

Access the court’s decision on contractually limiting liability for fraud (Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corp. [2024] EWHC 35 (TCC))