Essential Corporate News – Week ending November 2, 2018

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

The Government has announced two changes to the Entrepreneurs’ Relief (ER) regime in the 2018 Budget, both aimed, in the Government’s mind, at ensuring the relief is targeted at genuine entrepreneurs who have a real economic stake in the relevant business prior to a disposal. These changes follow on from the expansion of ER which was announced in the 2018 Spring Statement. Draft legislation has been issued covering each of these two new changes, as well as revised draft legislation, following the initial publication on July 6, 2018, on the application of ER on gains arising before a dilution event.

Definition of “personal company”

The first change adds two further tests to the definition of “personal company” at section 169S(3) Taxation of Chargeable Gains Act 1992 (TCGA). In addition to the requirement that the individual claiming ER holds at least five per cent of the ordinary share capital and voting rights in the company being sold, an individual claiming ER must now also hold at least a five per cent interest in both the company’s distributable profits, and assets available to equity holders on a winding up. 

The requirement to meet these new tests applies to disposals occurring from October 29, 2018. Any individuals previously intending or expecting to receive ER on a share disposal should consider whether they meet these additional requirements.  The legislation is widely drafted; where there are non-management investors with preferential rights, this may prevent ER being available.

Minimum qualifying period

The period during which the qualifying conditions for ER must be met will be increased from one year, to two years from April 6, 2019.  In the context of share disposals occurring after this date, this means the qualifying conditions (including the economic tests set out above) must be met for two years ending at the time of the disposal of the shares.  The proposed draft legislation includes specific provisions so that where individuals are disposing of shares which they received as consideration for transferring their business to a company, the pre-transfer period will be taken into account in deciding whether the qualifying period has been met.

Transitional rules will also be included so that the one year qualifying period continues to apply where the individual’s business ceased (or the company ceased to be a trading company or a holding company of a trading group) before October 29, 2018, and the disposal occurs within three years of the cessation.

This change to the minimum qualifying period also applies to individuals disposing of shares acquired under an EMI scheme. ER will only be available where those shares are sold two or more years after the grant date (and all other qualifying conditions are met during that two year period).  In line with the proposed transitional provisions, the one year qualifying condition will continue to apply to disposals of shares granted under an EMI option where a company has ceased to be a trading company or a holding company of a trading group prior to October 29, 2018.   

Draft legislation published on gains arising before dilution event

A revised version of new Chapter 3A in Part 5 TCGA has also been published, following the initial release of draft legislation in July 2018. There are no significant updates to the drafting; however, there has been further clarification on the treatment of disposals of shares arising following a reorganisation of the share capital of a company.  Despite repeated comments in the responses to consultation, there has been no movement from the Government on allowing an individual to automatically defer any accrued gain rather than including the requirement to make an election to avoid a potential dry tax charge, or allowing the exercise of options by employees to qualify as a “relevant share issue” which would otherwise give an individual the benefit of the dilution event protections in such circumstances.

(Capital Gains Tax: Entrepreneurs’ relief: definition of a ‘personal company’ policy paper – 29.10.18)

(Draft Finance (No. 3 Bill) Schedule 1: Entrepeneurs’ Relief – 29.10.18)

(Draft Finance (No. 3 Bill) Clause 1: Entrepeneurs’ Relief – 29.10.18)

The recent High Court decision in the Lloyds Banking Group case means that pension scheme trustees must correct any differentials for men and women caused by guaranteed minimum pensions (GMPs). This briefing from the Norton Rose Fulbright pensions team considers that decision and looks at  how employers can control the costs associated with achieving this.

On October 30, 2018 the Department for Business, Energy and Industrial Strategy published the Takeovers (Amendment) (EU Exit) Regulations 2019 in draft. These amend Part 28 Companies Act 2006 (CA 2006) to enable the domestic takeovers regime to operate effectively on a freestanding basis outside the EU framework once the UK leaves the EU.

The EU Takeovers Directive (Directive 2004/25/EC) established the legal framework through which company takeovers are regulated in the EEA and it was transposed into UK domestic law by Part 28 CA 2006. The purpose of the draft Regulations is to make the changes needed to fix deficiencies in the CA 2006 arising from the UK’s exit from the EU and so preserve, so far as possible, the current takeover regime.

The draft Regulations amend the CA 2006 by removing references to EU law and transposing specific Articles of the Takeovers Directive into a new Schedule 1C CA 2006. As under the current CA 2006, the Takeover Panel is required to make rules giving effect to these provisions.

The only Article of the Takeovers Directive currently referred to in CA 2006 that is not being transposed in this way is Article 4.2 concerning shared jurisdiction. The EU takeovers regime includes a system of shared jurisdiction for companies that have their registered office in one EEA member state and whose securities are only admitted to trading on a regulated market in one or more other EEA member state(s). The shared jurisdiction regime works on a reciprocal basis within the EU legislative and cooperative framework and this reciprocal arrangement will no longer apply to the UK after Brexit.  As a result, the draft Regulations remove the requirement for the Takeover Panel to implement the shared jurisdiction regime from the CA 2006.  This means that offers for companies that have their registered office in the UK and that satisfy the “residency test” under the Takeover Code will be subject to the sole jurisdiction of the Takeover Panel.  Offers for companies that have their registered office in an EEA member state and their securities admitted to trading only on a regulated market in the UK will no longer be regulated by the Takeover Panel.

The draft Regulations are due to come into force on exit day.

(Capital Requirements (Amendment) (EU Exit) Regulations 2018: draft statutory instrument – 30.10.18)

(Capital Requirements (Amendment) (EU Exit) Regulations 2018: explanatory information – 30.10.18)

On October 31, 2018 the Department for Business Energy and Industrial Strategy published the Companies, Limited Liability Partnerships and Partnerships (Amendment etc) (EU Exit) Regulations 2018 which aim to ensure that the UK’s company law framework is able to function effectively on and after exit day.

Changes are being made to aspects of the Companies Act 2006 and supporting secondary legislation as on exit day they will no longer operate effectively and so require technical amendments to make them operable. Other amendments are being made to reflect the UK’s position outside the single market and common framework in the area of company law and to ensure that the UK does not provide more preferential treatment to EEA companies, so preventing a breach of the World Trade Organisation’s Most Favoured Nation rules.

The changes in the draft Regulations have been grouped together as miscellaneous changes to the UK’s company law framework, other than those directly relating to either accounting or audit which are being addressed in separate statutory instruments. The amendments include the following:

• Changes to the definition of “regulated market”: The definition is being amended so that there will be a “UK regulated market” and an “EU regulated market” definition.
• Changes to the filing requirements in respect of EEA corporate directors and secretaries: From exit day UK companies with an EEA company appointed corporate director or secretary (or who wish to make such an appointment in the future) will have to provide the same information as they do for non-EEA corporate directors and secretaries.
• Overseas Companies Regulations 2009: The draft regulations amend the 2009 Regulations to ensure that after exit day all overseas companies have the same requirements irrespective of whether they are incorporated in the EEA or not. In addition, all overseas companies will have to display the same information on their business letters, order forms and websites, irrespective of whether they are EEA incorporated or not.
• Permitted disclosure provisions: Currently, certain regulations permit disclosure of protected information by the UK Registrar of Companies to specified public authorities and to UK and EEA credit reference agencies, credit institutions and financial institutions. The draft Regulations make amendments to enable the Registrar of Companies to continue to disclose information to specified public authorities but this will be restricted to those in the UK.
• Cross-border mergers: The draft Regulations revoke the Companies (Cross-Border Mergers) Regulations 2007 and associated legislation as after exit day the UK will no longer have access to the regime designed for mergers to occur between EEA states.

The draft Regulations are due to come into force on exit day.

(The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2018 draft statutory instrument – 31.10.18)

(The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2018 explanatory memorandum – 31.10.18)

On October 31, 2018 the Department for Business, Energy and Industrial Strategy published the Accounts and Reports (Amendment) (EU Exit) Regulations 2018. These make a number of amendments to Part 15 Companies Act 2006 (CA 2006) relating to the preparation and filing of accounts by companies in the UK. Part 15 CA 2006,  with regulations made under Part 15, transposed into UK law the aspects of the EU Accounting Directive (Directive 2013/34/EU) which related to companies.

The draft Regulations address a number of minor inoperabilities arising from the UK’s exit from the EU, such as substituting references to the Accounting Directive with references to domestic legislation, as well as making changes which have more significant impacts, such as limiting the scope of certain exemptions so that they apply only to UK registered companies with UK parents.

The accompanying explanatory memorandum notes that the UK reporting framework derives heavily from EU law and in places it relies on reciprocal arrangements for company group structures. Once the UK leaves the EU, EEA states will be third countries in relation to the UK and the UK will be a third country in relation to EEA states.  In the absence of a negotiated agreement about the economic relationship between the UK and the EU, it will be inappropriate to continue with preferential treatment for EEA entities or UK entities with parents or subsidiaries from EEA states, or entities listed on EEA regulated markets as this would amount to unreciprocated preferential treatment.  Entities from, and listed on markets in, EEA states will be treated in the same way as entities from, and listed on markets in, other third countries.  However, preferential treatment will continue for UK entities, UK entities with UK parents or subsidiaries and for those entities listed on UK markets. 

In general, changes made by the draft Regulations which relate to financial years will apply to financial years beginning on or after the day the UK leaves the EU. However, for financial years that begin before, but end or on after, that date, the relevant UK law will apply as if the UK continued to be a member state.

Amendments are also being made to other legislation, including the Partnerships (Accounts) Regulations 2008, the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008, the Overseas Companies Regulations 2009 and the Reports on Payments to Governments Regulations 2014.

There will be another instrument which deals with the adoption of international accounting standards for the UK, and related consequential amendments, which will be published in due course.

(The Accounts and Reports (Amendment) (EU Exit) Regulations 2018 draft statutory instrument – 31.10.18)

(The Accounts and Reports (Amendment) (EU Exit) regulations 2018 explanatory memorandum – 31.10.18)

On October 31, 2018 the Department for Business, Energy and Industrial Strategy published the European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2018.These draft Regulations will ensure that European Public Limited-Liability Companies or Societas Europaea (SEs) registered in the UK on exit day have a clear legal identity and a domestic framework within which to operate.

The draft Regulations provide for the following:

• Any SEs registered in the UK on exit day will convert on exit day to a new UK corporate form, a UK Societas.
• The draft Regulations deal with resulting changes, such as those relating to registration and name. As it will not be possible to register new SEs in the UK after exit day, the draft Regulations omit provisions on formation (and any associated publication requirements) together with those relating to transfer of a UK registered office to another member state.
• In other respects, the draft Regulations retain the structure of SEs and provisions relating to accounts, winding up, liquidation, insolvency and cessation of payments in order to retain the current framework for UK Societates as appropriate.
• The intention is that a UK Societas will be a temporary stage for entities rather than a long-term corporate choice, allowing them more time to take appropriate action of their own. As a result, the current requirements which provide for the conversion of an SE into a public company have been adopted to allow the conversion of a UK Societas into a public limited company. The current requirement that an SE be registered for a minimum period of two years, or that the first two sets of annual accounts have been approved, before it can convert to a public limited company has not been retained so that UK Societates can take appropriate permanent action without delay.
• In order to retain as many of the employee rights as practicable for UK Societates, provisions relating to confidentiality have been maintained, as has protection for employees where they are involved in the employee involvement process. However, the draft Regulations omit provisions relating to the establishment of the special negotiating body and employee involvement agreement for UK Societates because generally employee involvement agreements will have had to have been in place prior to registration of these entities as an SE, and there will be no new formations.
• As regards the rights that exist for UK employees employed by SEs registered in other member states, protection has been maintained where there remains the possibility that such employees could continue to be involved in the employee involvement process. This does not include, for example, rights where such employees are members of a special negotiating body, as they will no longer be in a member state.

As well as amending the European Public Limited-Liability Company Regulations 2004 and the European Public Limited-Liability Company (Employee Involvement) (Great Britain) Regulations 2009, as well as certain retained direct EU legislation, minor amendments have also been made to the Registrar of Companies (Fees) (European Economic Interest Grouping and European Public Limited-Liability Company) Regulations 2012 (2012/1908) and the European Public Limited-Liability (Register of People with Significant Control) Regulations 2016 (2016/375), to reflect the fact that there will be no new registrations of SEs.

The draft Regulations are due to come into force on exit day.

(European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2018 draft statutory instrument – 31.10.18)

(European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2018 explanatory memorandum – 31.10.18)

On October 31, 2018 the Department for Business, Energy and Industrial Strategy published the draft European Economic Interest Grouping (Amendment) (EU Exit) Regulations 2018 which will ensure that any European Economic Interest Grouping (EEIG) registered in the UK immediately before exit day has a clear legal identity and can operate effectively on and after that day.

The draft Regulations provide the following:

• Any UK EEIG still registered at Companies House on exit day will automatically be converted to a new corporate form.
• The new corporate form will preserve the current framework, unchanged as far as possible and appropriate, for affected companies on a UK only basis i.e. no ability to transfer registered office to another member state.
• The automatic conversion will include an automatic name change of the company designation from EEIG to UKEIG.
• UKEIG will be a temporary stage for entities, allowing them more time to take more appropriate action, rather than a long-term corporate choice. As a result, the ability for new registrations under the framework will be removed.

The draft Regulations amend the European Economic Interest Groupings Regulations 1989 and the Registrar of Companies (Fees) (European Economic Interest Grouping and European Public Limited Liability Company) Regulations 2012. They are due to come into force on exit day.

(The European Economic Interest Grouping (Amendment) (EU Exit) Regulations 2018 draft statutory instrument - 31.10.18)

(The European Economic Interest Grouping (Amendment) (EU Exit) Regulations 2018 explanatory memorandum - 31.10.18)

On October 30, 2018 the Financial Reporting Council (FRC) launched a project to challenge existing thinking about corporate reporting and consider how companies should better meet the information needs of shareholders and other stakeholders.

As part of the project, the FRC will review current financial and non-financial reporting practices, consider the information investors and stakeholders require, consider the purpose of corporate reporting and the role of the annual report and other types of corporate communications, and look at how technology can assist companies in delivering information to stakeholders. The FRC expects the project to lead to a series of calls for action for changes to regulation and practice. The FRC will publish a thought leadership paper consolidating the outcomes of the project later in 2019.

The FRC are looking for up to fifteen participants to join an advisory group to support the project, and is accepting nominations for participants until November 15, 2018.

(FRC: Future of Corporate Reporting – Call for participation – 30.10.18)