OASIS

                        ORGANIZATION OF ADVOCATES SPECIALISING IN INTERNATIONAL SERVICES

UK 2009/2010

INTRODUCTION

The past year has been one of change in several areas of the law in England and Wales and this is only a brief summary of some of the most significant.  If you would like further information on any aspect please let us know.  As we write, a General Election is pending on 6 May 2010 which may bring to an end 13 years of rule by the Labour Party and, if they are replaced by the Conservative Party, substantial repeals of legislation are promised.  On the other hand, a surge of popularity for the centre Liberal Democrat Party, following our first “Presidential” TV debates between the leaders of the three main parties, may, if no party has an outright majority in the House of Commons, return them to power for the first time for many years as part of a coalition government.  This could mean a less significant change of direction, but the possible introduction of some form of proportional representation, an outcome feared by many commentators as leading to indecision and instability.  Whatever the election result, the replacement of the House of Lords by a Supreme Court, which is referred to below, bringing to an end six centuries of judicial tradition, is probably the most significant development.  This seems unlikely to be reversed, although the Conservatives have promised to remove the direct application of the European Convention on Human Rights, which was never intended to replace our ancient liberties, but was designed to share them after WWII with other European countries, where such liberties had lately been in jeopardy.

1                    The Companies Act 2006 (the “CA 2006”)

On 1 October 2009 this very important reforming Act, which has been implemented in stages over the past few years, came fully into force.  However, even before then its provisions on corporate meetings were significantly amended with effect from 3 August 2009 by The Companies (Shareholders’ Rights) Regulations 2009.  Accordingly, it is now necessary to consider the law relating to corporate meetings contained in CA 2006 Part 13 in four layers, depending upon whether the company concerned is private, public, quoted (ie. listed on an EEA market, NASDAQ or NYSE), or traded on a regulated EEA market.  This may be considered a disappointing outcome for a statute, which had as one of its main aims making company law simpler and more accessible.

Last year we reported on the simplified procedures, analogous to those available in respect of cyber-squatting and domain names, which had been developed to deal with “company name squatting”.  The procedure has already proved itself to be an inexpensive and useful new tool to protect a client’s goodwill.  Some 90 cases have now been decided up until 11 March 2010; all but three in favour of the applicant.  Among the well known brands already protected by these means are: Adidas, Harrods, Java (Sun Microsystems), Lego, Mars, Nokia, Reebok, Virgin, Volvo and Zurich Insurance.

2                    The Corporate Governance Code (the “Code”)

The review by The Financial Reporting Council of the Code following the financial crisis, and that of Sir David Walker of governance in banks and other financial institutions (“BOFIs”) arising in the same circumstances were each completed at the beginning of December 2009.  Although these reviews were initiated separately, they liaised closely and their reports were virtually simultaneous.  The Walker report is a wide ranging and thoughtful assessment of the procedures adopted by major UK BOFIs, and contains a large number of recommendations for good practice in BOFIs governance, including in particular many on executive remuneration and the management and control of risk.  Whilst only a limited number of the Walker recommendations have made it into the revised draft Code as mandatory requirements, it remains to be seen how influential those recommendations which have not been specifically adopted in the Code, will become a matter of practice in the governance and regulation of BOFIs.

3                    AIM

AIM, the junior market of the London Stock Exchange (“LSE”), has suffered in the aftermath of the financial crisis.  However, it has fared better than other junior markets.  Having experienced a decline in the total funds raised following a clear peak in June/July 2007, there was evidence that this decline began to bottom out in July 2009.  In 2009, approximately £5.5 billion in aggregate was raised on AIM from primary and secondary offerings.  AIM has also remained active in regulatory reform.  Following consultation, LSE published revisions to the AIM Rules for Companies and the notes to it (together the “AIM Rules”) in June 2009 and February 2010 to respond to on-going changes in the global market place, and make targeted amendments to the AIM Rules to protect AIM’s position as the world’s leading growth market.

4                    London Stock Exchange Overhaul

In 2007, the UK Financial Services Authority (“FSA”) (in its capacity as the UK Listing Authority) initiated a review of the structure of the listing regime as set out in the Listing Rules, which govern the LSE’s Main Market (formally known as the Official List) (the “Main Market”).  As a result of this review, various changes to the listing regime in the UK have been announced.  At present, the Main Market has two listing segments: Primary listing, which is subject to the full breadth of the Listing Rules; and Secondary listing, which until 6 October 2009 was available to overseas companies only.  The FSA, after the completion of its consultation, decided to change the Listing Rules and these changes were ushered in by the publication of the Listing Rules Sourcebook (Amendment No. 3) Instrument 2009 and the Listing Rules Sourcebook (Amendment No. 4) Instrument 2010.  These changes include the restructure of the listing regime into two segments: Premium listing and Standard listing, replacing Primary and Secondary listings, respectively.  A Premium listing will require a company to meet the “super-equivalent” standards (that is, requiring companies to comply with rules that exceed the relevant EU directive standards) of the Listing Rules, while a company with a Standard listing will only need to meet EU minimum standards.

5                    Virtual Closings: New Guidance from The Law Society post Mercury

We reported last year on the difficulties arising in relation to the execution/signature of documents following the Mercury case.  The Law Society has now produced guidelines on this which may be accessed at:

http://www.lawsociety.org.uk/productsandservices/practicenotes/executionofdocs/4447.article

6                    The Existence of a Contract

In the case of RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14 (“Molkerei”) the parties agreed that, based on a letter of intent, RTS would commence work.  The parties would then draw up a final contract (amended to meet their needs but basically incorporating the industry model form “MF/1” conditions).  Work continued but in the end the parties fell out and the outstanding balance due was not paid by Muller.  After an appeal to the Supreme Court it was decided a binding and enforceable contract had obviously been intended by the parties.  Lord Clarke’s judgment provides general guidance as to the main issues in the event of a dispute arising in such cases in future.  Other recent cases illustrate both the courts’ traditional reluctance to imply that a contract has been concluded, and their willingness to do so in appropriate circumstances, particularly when a contract is partly performed.  However, as the Supreme Court stated in Molkerei: “The moral of the story is to agree first and to start work later.”

7                    Changes to the Insolvency Rules

A number of significant changes were made on 6 April 2010 to the Insolvency Rules 1986 (the “1986 Rules”), which govern insolvency processes in the UK and supplement the Insolvency Act 1986.  These changes are being brought in through the Insolvency (Amendment) Rules 2010 (the “2010 Rules”) and are in line with the general reforms undertaken by the UK government to make insolvency/bankruptcy processes more efficient and cost-effective.  These are likely to be the last set of changes to be made to the 1986 Rules, as it is planned to bring in a brand new set of insolvency rules next year.

8                    Syndicated Loans in 2009

Following the collapse of Lehman and the Icelandic banks in 2008, the Loan Market Association amended its standard syndicated loan documentation in 2009, principally regarding defaulting lenders, as it had previously largely been silent in that respect.

9                    Virtual Assignment of Property Interests

The recent decision by the Court of Appeal in the case of Clarence House Limited v National Westminster Bank Plc [2009] EWCA Civ 1311 (“Clarence House”), has now left no ambiguity as to the validity of a virtual assignment.  This is an arrangement under which all the economic benefits and burdens of a relevant lease (including any management responsibilities) are transferred to a third party, but without any actual assignment of the leasehold interest or any change in the actual occupancy of the premises in question.  It is typically employed where the relevant lease contains covenants against assigning or parting with the possession of the demised property without the consent of the landlord, and there are concerns either that the landlord may be unwilling to consent to a legal assignment of the lease because of perceived doubts about the financial standing of the assignee, or that the landlord’s consent may not be available in advance of the scheduled date for completion of the transaction.  Clarence House confirms the continued potential use of virtual assignments as a mechanism to facilitate portfolio transactions for tenants, without damaging landlords’ interests and/or as a means to side-step potentially onerous alienation covenants.

10                Philosophical Belief in Climate Change Protected as a Quasi-religion

The Employment Equality (Religion or Belief) Regulations 2003 (“EER 2003”) prohibit discrimination by reason of religion or philosophical belief.  However, the definition of what constitutes religion or a philosophical belief has always been unclear.  The interpretation of religion has been relatively straight forward, as it is generally accepted that “religion” includes those that are widely accepted as such in the UK.  However, defining philosophical belief has been more complicated.  In Grainger Ltd v Nicholson [2010] IRLR 4, [2009] UKEAT 0219_09_0311, [2010] ICR 360 the Employment Appeal Tribunal upheld a decision that a belief in man-made climate change could be a “philosophical belief” as defined in the EER 2003.  This is the first case in which a decision has been made as to what constitutes a non-religious or philosophical belief and it will interesting to see what other belief systems will benefit from the protection of discrimination legislation.  This follows an incident where an unemployed person dressed as a “hoodie” received an apology for being required to remove his hood from the Government Job Centre on the grounds of his “faith” as a Jedi Knight (as in the 1977 Star Wars film).  It should be noted that discrimination claims have the advantage over normal employment claims of not being subject to any statutory cap.

11                Software Services Supply Contracts – the BSkyB v EDS Decision [2010] EWHC 86 (TCC) (“BSkyB”)

The long awaited judgment in BSkyB was handed down by the Technology and Construction Court in late January 2010.  BSkyB is of interest because, in order to get round a stringent limitation clause in the underlying supply agreement, the Claimant, BSkyB, successfully alleged fraudulent misrepresentation on the part of the Defendant, the IT services supplier, EDS.  A fraudulent misrepresentation occurs if a party makes a representation knowing that it is not true, or is reckless as to whether it is true or false, and the other party relies on it in entering into the contract.  You cannot normally exclude or limit liability for fraudulent misrepresentation under English law by clauses capping liability or defining the entire agreement to exclude fraudulent pre-contract misrepresentations by sales representatives.  Depending on the outcome of the appeal intended by the Defendants in this action, the repercussions of this decision for supply contracts in the IT industry, and elsewhere, could be considerable.  Proving fraudulent misrepresentation is notoriously complex and costly.  Ramsey J found in favour of the Defendant on a number of points, including one out of five allegations of fraudulent misrepresentation.  This flowed to a significant extent from the proven untrustworthiness of one of the Defendant’s witnesses, who claimed, for example, to have studied for his MBA at a reputable university.  This was disproved very effectively by the Claimant’s counsel buying an identical degree from the same institution on line for his dog, Lulu, who apparently obtained better grades than the witness! As a result the Claimant was, in effect, able to circumvent the limitation of liability clause.

12                International Fraud/Anti-Corruption - The Bribery Act 2010

This Act will give the UK a strong platform upon which to build new anti-corruption enforcement efforts.  The purpose of the new legislation is modernisation by creating a single piece of legislation criminalising bribery, and other associated corrupt activities, and by repealing what is generally accepted to be outdated legislation.  It creates four offences; two general offences of bribery, one specific offence of bribing a foreign public official and a new corporate offence of failing to prevent bribery on its behalf.  Perhaps the most striking departure is the fourth offence.  The Ministry of Justice will be required to provide guidance as to what constitutes adequate anti-corruption procedures to provide a defence.

13                Prenuptial Agreements Given Limited Recognition in England

In the recent Court of Appeal case of Radmacher v Granatino [2009] 2 FLR 1181 (formerly Granatino v Granatino [2009] EWCA Civ 649) the English Courts moved a step further to accepting a foreign prenuptial agreement (“PNA”).  Before this case, the English Courts in deciding what financial settlement should be awarded following a divorce might consider that a PNA was a material consideration.  However, there was no guarantee that the terms of the PNA would be implemented, and instead various factors relating principally to the fairness of the PNA were taken into consideration, such as whether there has been full disclosure of assets and whether both parties obtained independent legal advice.  Given the absence of both of these factors in this case, we can see a significant departure by the CA.  The decision has been appealed to the Supreme Court.

14                Taxation

To a large extent the 2010 Budget delivered on 24 March 2010 is a holding operation, as following the election it is clear that, whichever government is returned, taxes will have to rise and public expenditure will have to be cut, to deal with the poor public finances following the financial crisis.  It was, however, confirmed that the income tax rates for 2010/11 will be 20% on the first £37,400 of taxable income, 40% on income between £37,400 and £150,000 and a new additional rate of 50% on income above £150,000.  The personal allowance level is set to remain frozen at £6,475.  From tax year 2011/12 tax relief on pension contributions will be restricted for those taxpayers who have gross income of £150,000 and over.  Both these measures against higher earners would be retained by the Conservatives.  From midnight on 24 March 2010, the threshold for stamp duty to apply is increased from £125,000 to £250,000, but only for first time buyers.  Stamp duty will be increased on properties sold for more than £1,000,000 to 5% from the current 4% rate from 1 April 2011.  The main rate of corporation tax applying to companies with profits of more than £1.5 million remains at 28% for the financial year commencing on 1 April 2010.  The small companies corporation tax rate for companies with profits up to £300,000 of profits will increase to 22% with effect from 1 April 2011.  The threshold for a lower effective rate of capital gains tax at 10% for those who are entitled to claim entrepreneurs’ relief has been doubled from £1,000,000 to £2,000,000 of gains.  The current government intends that, with effect from 6 April 2011, the National Insurance rates, for both employee and employer Class 1 National Insurance contributions and Class 4 National Insurance contributions for the self employed, will be increased by 0.5% as previously announced, but the Conservatives would reverse this.  The standard rate of VAT reverted to 17.5% from 15% on 1 January 2010.  The compulsory VAT registration limit will increase to £70,000 from 1 April 2010.

15                The Supreme Court

The coming into force of the Constitutional Reform Act 2005 on 1 October 2009 has attracted much attention due to the controversial nature of the developments it implements, including the creation of a new Supreme Court (“SC”).  Although the transfer of the Lords of Appeal in Ordinary from the Palace of Westminster to Middlesex Guildhall appears to be symbolic in completing a separation of powers, the SC does differentiate itself from the House of Lords (“HOL”) in certain important respects.  It has been a concern for many years that the legislative functions of the HOL and the role of the Judicial Committee of the HOL, are not apparent to the public.  Therefore creating a separate entity, with a distinct name and role, would be a first step in reasserting the importance of separating the executive, the legislature and the judiciary.  The SC’s jurisdiction is more extensive than that of the Appellate Committee of the HOL.  Even though it has been said that, in practice, members of the HOL, who were also Lords of Appeal in Ordinary, rarely took part in debates of a political nature when they shared premises with the legislative branch of power, the creation of the SC marks what some have referred to as a milestone in constitutional history.  Some commentators even believe that, as a result of mission creep, this will lead to a judicial attitude similar to that of the justices of the US Supreme Court, willing, and perhaps even eager, to make law rather than merely interpret law passed by Parliament.

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