Company Law Reform Economic Crime and Corporate Transparency Bill

Background

The Bill was published on 22 September 2022. It is the second part of a legislative package aimed at preventing abuse of UK corporate structures and tackling economic crime. It follows on from the Economic Crime (Transparency and Enforcement) Act 2022 which provides for the creation and maintenance of a register of overseas entities by Companies House and contains requirements for overseas entities owning UK property to apply for registration and provide information about their beneficial owners.

According to the UK government the Bill has 3 key objectives:

• Prevent organised criminals, fraudsters, kleptocrats and terrorists from using companies and other corporate entities to abuse the UK’s open economy

• Strengthen the UK's broader response to economic crime by giving law enforcement new powers to seize cryptoassets and enabling businesses in the financial sector to share information more effectively to prevent and detect economic crime

• Support enterprise by enabling Companies House to deliver a better service to improve the reliability of its data which will help inform business transactions and lending decisions across the economy

The effect of the Bill will be to amend and include new provisions in the Companies Act 2006 and related legislation.

Summary

The principal features of the Bill include:

• broader powers for the Registrar of Companies enabling it to become a more active gatekeeper over company creation and custodian of more reliable data concerning companies and other UK registered entities. The Bill creates a number of objectives for the Registrar with the underlying intention being the maintenance of the integrity of the registers kept at Companies House in relation to a particular company

• enhanced investigative and enforcement powers to Companies House enabling cross-checking of data with other public and private sector bodies. The Bill intends to make it easier for businesses in regulated sectors to share customer information with each other for the purposes of preventing, investigating, and detecting economic crime

• identity verification requirements for all new and existing registered company directors, People with Significant Control and those delivering documents to Companies House

• greater protection to personal information provided to Companies House limiting opportunities for fraud

• a new corporate criminal offence for failure to prevent fraud and false accounting offences committed by employees or agents (see below)

• powers to quickly and more easily seize and recover cryptoassets.

Failure to prevent fraud

Under the proposed new offence, an in scope organisation will be strictly liable (i.e. it will not be necessary to prove awareness on the part of the organisation) where an employee or agent commits a specified fraud or false accounting offence under UK law with intent to benefit the organisation, or another person to whom they provide services on the organisation's behalf. It will be a defence for the organisation to prove that it had in place reasonable fraud prevention procedures at the relevant time as were reasonable or that it was not reasonable to expect it to have prevention procedures in place.

The government will publish guidance on the nature of reasonable procedures to prevent fraud before the new offence comes into force. The offence will only apply to large organisations which are defined as corporates and partnerships who meet 2 of the following criteria in the year that proceeds the year of the fraud offence: more than 250 employees; more than £36 million turnover; more than £18 million in total assets.

Although the Bill is silent as to the jurisdictional scope of the offence, the government has indicated that if an employee commits a fraud under UK law, or targeting UK victims, the employer could be prosecuted even if the organisation (and the employee) are not based or incorporated in the UK. The maximum penalty on conviction will be an unlimited fine.

Timeline

The Bill completed its committee stage in the House of Lords on 11 May 2023 and is expected to receive Royal Assent before the Parliamentary recess in July.

Private Equity & Venture Capital- BVCA Model Documents

Earlier this year the British Private Equity and Venture Capital Association (BVCA), the industry body for the private equity and venture capital industry, published revised versions of its model documents for early stage investments. The documents were last reviewed in 2017.

The primary function of the documents is to promote industry standard legal documentation to facilitate efficient transaction execution. The model documents provide the template for most corporate arrangements involving institutional growth capital backed UK private enterprises.

The BVCA consulted broadly with practitioners and investors throughout the industry and the documentation reflects changes and trends in market practice for Series A and similar early stage investments. The documents are intended to strike a balance between the interests of founders, investees and investors. According to those involved in the process the changes were influenced by a number of trends including a convergence with US market practice resulting from the increased amount of US capital in the UK system, adapting the documents for use in EIS/ VCT transactions and changes in UK M&A deal structures again influenced by US market practice.

Summary of Changes

The principal changes are summarised below:

• Structure

The subscription agreement and shareholders’ agreement are now separate documents. The subscription agreement deals substantially with the mechanics of the investment and warranties.

• Warranties

The warranties are given solely by the investee (not the founders) and have been extended to include matters such as ESG, the revised national security regime and VCT/ EIS related matters. The warranty limitations have been altered to remove any de minimis exclusion (i.e., minimum monetary threshold which must be reached before a claim can be brought) and impose a time limit of 18 months for bringing claims. This is a sensible approach to issues which frequently assume a disproportionate of negotiation time. That said seed investments are likely to require some comfort from founders.

• Disclosure

The disclosure regime has been altered such that the blanket disclosure of data room contents and due diligence replies will not be accepted. This is unlikely to be controversial for early stage businesses.

• Governance Undertakings

The scope of governance undertakings in the Shareholders Agreement has been extended to include the requirement for an investee to implement policies on workplace behaviour, climate and diversity as well as a sustainability plan. In practice this is likely to be transaction and sector specific with different investors having their own “house” approach to a number of these matters.

• IPO/ Sale o The shareholders’ agreement omits the previously established principle exempting investors from giving warranties on an exit. Again in practice many investors are likely to have hard rules on this. o Under the articles all shareholders are subject to a maximum 180 day lock-up post- IPO. The likelihood is that most brokers will require a significantly longer period from senior management.

• Vesting

Leaver provisions have been modified: o Bad Leavers lose all their shares (vested or otherwise) o Good leavers lose unvested shares o In the case of early leavers - a founder leaving the business in the first 12 months – the document includes an option for those leavers to lose all their shares whether or not a good leaver o The concept of a “Bad Leaver” has been narrowed to matters considered to be particularly harmful to the investee e.g. breaches of restrictive covenants. Voluntary resignation is retained but as an option o Vesting occurs over 48 months (a provision which is likely to be subject to specific negotiation in each case)

• Founder Directors

A founder’s right to appoint a director terminates upon becoming a leaver.

• Pre-Emption

These are restricted to major investors. This is a sensible step from the investee company’s perspective as it enables a more efficient fund-raising process.

Drag-Along

Dragged shareholders are now required to participate in all sell-side obligations (previously the documentation obliged them only to give title and capacity warranties) with certain exceptions e.g., business warranties. This means that dragged shareholders will amongst other things be subject to price adjustment mechanisms and removes the perverse preferential treatment previously enjoyed by dragged shareholders.

• Articles

The investee’s shareholder base typically expands exponentially at each fund raise. Each finance round will usually require amendments to the articles of association which in turn requires the support of 75% of all voting shareholders. In practice this means that a minority of 25% plus one can block a financing round. The new documentation requires existing shareholders to approve future amendments to the articles sanctioned by the board, “investor majority” and a simple majority of the equity shareholders. This change is another example of the convergence of the documentation with its US equivalent.

• Class Rights

Another typical albeit indirect consequence of a new finance round is the variation of the rights attached to a particular existing class(es) of shares. The new articles facilitate this process by requiring only the written consent of a majority of the class (rather than 75%).

• ·Holding Company

As the market has continued to evolve and become increasingly sophisticated so the need to interpose a new holding company into an investee group structure has increased (e.g., for tax structuring or pre-IPO). The documentation now provides for these structures to be implemented with the approval of the board and investor majority.

The BVCA also announced its intention to publish further model documents in due course.

Employee Share Schemes

The government has announced its intentions to seek views on an overhaul of employee share ownership schemes. Specifically, the treasury is reviewing the Save As You Earn and Share Incentive Plan schemes being the government’s nondiscretionary (all employee) tax advantaged share schemes. The government also offers 2 discretionary tax-advantaged employee share schemes namely Enterprise Management Incentives and Company Share Option Plans.

Employee share ownership is supported across the political spectrum as a means for employers to motivate and retain staff, align the interests of employer and employee and help staff save.

SAYE and SIP schemes enjoy generous tax breaks but each is subject to strict rules. SAYE schemes allow a company to grant to eligible employees an option to acquire shares in the company at a fixed price. That price can be discounted by up to 20% of the market value. SIPs allow companies to help eligible employees acquire shares in the company; the shares are held in an employee benefit trust on behalf of participating employees and usually must be kept there for 5 years to secure the full tax advantages.

The review forms part of the government’s objective of growing the economy and sharing prosperity particularly among lower paid workers. There has been concern at the usage of these schemes and with a view to improving their attractiveness the government is considering simplifying the rules and improving their flexibility. The government has invited responses by 25 August 2023.