Corporate Focus Recent Updates

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1 Corporate Focus Recent Updates July 2010 CONTENTS UK Corporate Governance Code 2-3 Legislation update 4-5 Emergency Budget - 22 June Enforcement of Foreign Judgments 7-9 Shares Sales - Recovery of input VAT

2 UK Corporate Governance Code As a result of its review of the Combined Code on Corporate Governance (the Code), the Financial Reporting Council (FRC) has published the new "UK Corporate Governance Code" applicable to all companies with a premium listing on the London Stock Exchange from any accounting period beginning on or after 29 June The main changes The main changes to the Code are: Board reviews FTSE 350 companies will be required to have an external evaluation of the performance of their boards conducted at least every three years. The annual report of companies will have to state how such performance evaluation has been conducted. 'The new Code introduces the principle which states that "the board and its committees should consist of directors with the appropriate balance of skills, experience, independence and knowledge of the company to enable it to discharge its duties and responsibilities effectively Re-election All directors of FTSE 350 companies will be subject to annual re-election by shareholders. The directors of all other companies will be subject to election by shareholders at the first AGM after their appointment and to re-election thereafter at intervals of no more than three years. Any non-executive directors who have served for more than nine years will also be subject to annual re-election. Diversity The Code contains a specific reference to the requirement for diversity and, in particular, gender diversity in the composition of the board of directors, but unlike some other jurisdictions there is no specific quota requirement. The responsibilities of the chairman and directors The chairman shall be responsible for leadership of the board and for ensuring its effectiveness. He will also have a particular responsibility for training, evaluation and board composition. The non-executive directors should constructively challenge and help develop proposals on strategy. The chairman, the senior independent directors and all other non-executive directors will be required to allocate sufficient time to perform their responsibilities effectively, but no minimum number of days is set. Board balance and composition Under the old Code the independence of the directors was the main factor in determining and assessing the composition of the board, rather than their fitness for their position. The new Code introduces the principle which states that "the board and its committees should consist of directors with the appropriate balance of skills, experience, independence and knowledge of the company to enable it to discharge its duties and responsibilities effectively". 2

3 Risk management and internal control It will be the responsibility of the board to define the company's risk appetite and maintain a sound risk management system. The board should satisfy itself that appropriate systems are in place to identify, evaluate and manage the significant risks faced by the company. Accountability The annual report of the companies should explain the basis on which the company generates or preserves value over the longer term and the proposed plan for delivering the company's objectives. The directors should also report in annual and half-yearly financial statements that the business is a going concern. The annual report should identify members of all board committees, not just the nomination, audit and remuneration committees. Remuneration The performance-related elements of the executive directors' remuneration should be designed to promote the long-term success of the company and its risk policies. A requirement for consideration to be given to arrangements for reclaiming variable components in certain circumstances of misstatement or misconduct is also included. All forms of performance-related remuneration and not just share options, are discouraged for non-executive directors. Communication with shareholders Whilst previously, the chairman, senior independent director and other directors "as appropriate" were required to maintain contact with major shareholders, under the new Code the chairman should ensure that all directors are made aware of the concerns of their major shareholders. Conclusion 'Companies should use this opportunity to review their board policies, directors' service contracts and incentive schemes to ensure that they comply with the new Code The FRC stresses that it is important for companies to engage with the spirit of the new Code by applying and adhering to the main principles to nurture better transparency, accountability and communication with their shareholders. Companies should use this opportunity to review their board policies, directors' service contracts and incentive schemes to ensure that they comply with the new Code. Although the Code applies only to companies with a premium listing on the London Stock Exchange it is reasonable to expect that institutional investors will expect at least reasonable compliance (and/or explanations as to lack of such compliance) by companies with a standard listing or those whose shares are traded on the AIM Market. 3

4 Legislation update Difficulties with company names The Companies and Business Names (Miscellaneous Provisions) Regulations 2009 (the 2009 Regulations) came into force on 1 October 2009 and introduced more rigorous requirements for the approval of new company names. In particular, the 2009 Regulations set out a more extensive list of words that are disregarded when determining whether one company name is the 'same as' another already on the company names index. This means that Companies House will simply ignore the specified words when judging whether a proposed name is the same as one already on the index. Examples of words which did not appear in the previous legislation but are covered by the 2009 Regulations include 'UK', 'Services' and 'Holdings'. 'Companies House has developed a new 'Company Name Availability Search', which will return the 'same as' matches as defined in the 2009 Regulations' Prior to the 2009 Regulations, company names that included the new words would have been regarded as sufficiently distinctive and registered accordingly. However, the changes mean for example that a company with the name Company Limited which seeks to change its name to Company (UK) Limited may be prevented from doing so where an intervening registration for Company (UK) Services Limited exists. This is because the words "UK" and "Services" will be disregarded and the proposed new name will be considered the same as the pre-existing third party registration. Issues have arisen even where group companies merely wish to swap their names, because in effect each company is taking on a new name - and existing third-party registrations may prevent this. Companies House has developed a new 'Company Name Availability Search', which will return the 'same as' matches as defined in the 2009 Regulations. This new search enables users to check whether a proposed company name may conflict with a pre-existing company name and is available as an option in WebCHeck on the Companies House website. In addition to complying with the 2009 Regulations, companies should ensure that the name they wish to use does not contain any 'sensitive' words (such as 'International') which require official approval. Companies should also consider potential infringements of third party intellectual property rights when selecting a new company name. Use of a name in trade may constitute an infringement of existing registered or unregistered trade marks and it is therefore advisable to conduct appropriate searches prior to registering a company name. Bribery Bill receives Royal Assent The Bribery Bill received Royal Assent on 8 April As reported in our last edition of Corporate Focus, the Bribery Bill has been introduced to reform the law relating to bribery and corruption in the UK and provide a more effective legal framework to combat bribery in the public or private sectors. It is not clear as yet when the Bribery Act will come into force. The Bribery Act provides that formal guidance must be published with regard to the procedures organisations are required to put in place to show that they have adequate procedures for the purposes of the new corporate offence. The timing of when the Bribery Act comes into force will be determined by the publication of formal guidance. The Government's intention is to publish the guidance before the summer recess, which will be followed by a consultation period on the new guidelines. We will provide you with further updates in due course. 4

5 Financial Services Bill receives Royal Assent The Financial Services Bill received Royal Assent on 8 April The Financial Services Act 2010 (the Act) will come into force in different stages. The Act aims to strengthen financial regulation, improve corporate governance and remuneration practices and give the Financial Services Authority (FSA) new objectives and duties. These include: A new financial stability objective, including a duty for the FSA to determine and review its financial stability strategy in consultation with HM Treasury; A requirement to establish a new consumer financial education body; Enhancement of FSA's rulemaking and disciplinary powers; Powers to nullify remuneration agreements in breach of FSA's remuneration rules; Enhanced powers to impose rules banning short selling in financial instruments and to require any person to disclose information about their short selling; and A new power to impose a consumer redress scheme. The 'objects' of a company October deadline The list of 'objects' of a company, which was previously set out in the memorandum of association, is now deemed to be included in a company's articles of association by virtue of the Companies Act 2006 The list of 'objects' of a company, which was previously set out in the memorandum of association, is now deemed to be included in a company's articles of association by virtue of the Companies Act In the event the articles of association are amended, therefore, a company must either state the full list of objects in its new articles of association or must remove the deemed objects provision by passing a special resolution and filing form CC04 at Companies House. Many companies continue to overlook this requirement as a result of which the Registrar of Companies has now indicated that the Technical Offences Team will be following up on defaults. It should be noted that if a company does intend to remove its objects, this will not be effective until Form CC04 is filed with Companies House. Natural person directors Pursuant to the Companies Act 2006, since 1 October 2008 every company must have at least one director who is a natural person. A transitional provision granted an additional period of time for companies which had no natural person as a director as of 8 November 2006 to comply with the new law. This additional period will end on 1 October 2010 by which time any company which still does not have a natural person director must appoint one. 5

6 Emergency Budget - 22 June 2010 Introduction The Chancellor delivered the Emergency Budget on 22 June Full details of the cuts will be announced in the spending review which is to be presented on 20 October Numerous tax changes were announced and this article considers some of the more important for both companies and their shareholders. Corporation tax rates The mainstream rate of corporation tax is to reduce from 28 per cent to 27 per cent with effect from 1 April 2011 followed by further reductions to 24 per cent by 1 April The Government's hope is that this significant reduction will make the UK more attractive in the international context. For small companies (being essentially companies with profits up to 300,000 that are not closed investment-holding companies) the rate will reduce from 21 per cent to 20 per cent from 1 April (Tapering applies between 300,000 and 1,500,000 when the full mainstream rate is reached). Capital allowances New legislation will reduce the rate of writing-down on plant and machinery from 20 per cent to 18 per cent New legislation will reduce the rate of writing-down on plant and machinery from 20 per cent to 18 per cent. For items allocated to the special rate pool, which includes long-life assets and integral features, the rate will be reduced from 10 per cent to 8 per cent. The changes will take effect for the calculation of writing-down allowances for chargeable periods ending on or after 1 April 2012 for businesses within the charge to corporation tax and on or after 6 April 2012 for businesses within the charge to income tax. VAT New legislation will increase the standard rate of VAT from 17.5 per cent to 20 per cent, The 20 per cent rate will have effect for any supply made on or after 4 January 2011 and any acquisition or importation taking place on or after that date. HMRC have issued detailed guidance for VAT registered businesses so businesses should have adequate time to prepare for the change in rate. Insurance premium tax The standard rate of insurance premium tax which applies to most general insurance, including property, motor and medical insurance is to increase from 5 per cent to 6 per cent with effect for premiums received or written by an insurer on or after 4 January The higher rate of insurance premium tax which applies to travel insurance and to certain insurance (e.g. extended warranties) sold alongside motor vehicles and some consumer goods will increase from 17.5 per cent to 20 per cent at the same time. 6

7 Capital gains tax and entrepreneurs' relief 'Whilst there must be some disappointment at the reduction in the rates of capital allowances and the increase in the rate of VAT the significant reduction in corporation tax should certainly provide benefits' A new rate of 28 per cent has been introduced. For individuals, the rate of capital gains tax remains 18 per cent where total taxable gains and income are less than the upper limit of the income tax basic rate band. The 28 per cent rate applies to gains (or any part of gains) above that limit. The new rate has effect on and after 23 June It should be noted that there will be no taper relief or indexation relief available. The rate of capital gains tax for gains qualifying for entrepreneurs' relief will remain at 10 per cent and, with effect from 23 June 2010, the lifetime limit on gains has been increased from 2 million to 5 million. The annual exempt amount for remains at 10,100 despite widespread speculation that this would be reduced or abolished. Conclusion Overall the view seems to be that the Budget was positive for business. Whilst there must be some disappointment at the reduction in the rates of capital allowances and the increase in the rate of VAT the significant reduction in corporation tax should certainly provide benefits. On the personal tax side the new capital gains tax rate was less than was feared and the retention of the annual exempt amount is perhaps more generous than many had anticipated. In addition the increase in the limit for entrepreneurs' relief is certainly most welcome. Enforcement of Foreign Judgments A foreign judgment is not automatically enforceable in England and Wales. The applicable law and procedure for enforcement will depend upon the country where the judgment was originally obtained. The United Kingdom is party to several international conventions which provide for the direct enforcement of foreign judgments following their registration in this country. However, common law will still apply to judgments obtained in countries which are not party to such conventions including, for instance, the United States, China and Japan. Enforcement of judgment from member states of the European Union 'A claimant may have the judgment in an uncontested claim in the European Union certified as a European Enforcement Order' Uncontested claims in the European Union A claimant may have the judgment in an uncontested claim in the European Union certified as a European Enforcement Order. This is designed to provide a simple and quick enforcement mechanism based on mutual recognition. No time limits apply to seeking certification, provided the judgment remains enforceable in the country of origin and there is no requirement for registration or judicial approval of the judgment in the country of enforcement. A judgment that has been certified as a European Enforcement Order by the court of origin should be treated for enforcement purposes as if it had been delivered by the courts of the EU country in which enforcement is sought. 7

8 Other judgments in Europe Under the Jurisdiction Regulation ((EC) No 44/2001) (the Jurisdiction Regulation), a judgment of a court of another EU Member State in the case of a contested claim may be registered in the courts of England and Wales. The Lugano Convention of 1988 contains broadly the same provisions as the Jurisdiction Regulation and applies also to Iceland and Switzerland. A revised Lugano Convention dated 2007 was also ratified by Norway. No time limits apply to the making of an application for registration of a judgment under the Jurisdiction Regulation or the Lugano Conventions. Although, there are a number of defences to registration under both the Jurisdiction Regulation and the Lugano Conventions (such as recognition being contrary to public policy, the defendant not having been duly served with the document instituting the foreign proceedings and the judgment being irreconcilable with another judgment involving the same parties) neither the Jurisdiction Regulation nor the Lugano Conventions allow the review of the substance of such a judgment in any circumstances. Judgments from other countries In the absence of applicable conventions, common law applies according to which a foreign judgment can be enforced in England and Wales by bringing an English action claiming the amount of the judgment as a debt. The foreign judgment gives rise to an implied contract to pay, which can be enforced in England and Wales by bringing fresh proceedings. It is usually possible to obtain summary judgment on such a claim as, in the absence of fraud, there will be no re-examination of the merits of the case. Generally, the action must be brought within six years of the date the judgment became enforceable in order to avoid falling foul of the Limitation Act. English proceedings can also be commenced only if the English courts have jurisdiction and a judgment debtor may seek to raise a number of defences to establish that this is not the case. These include: That the foreign court lacked jurisdiction; That the judgment is contrary to public policy or obtained by fraud; That the foreign proceedings were in breach of an agreement as to the settling of the dispute; That the judgment is not final and conclusive; That the judgment is not for a definite sum of money; and That the judgment is for the enforcement of a foreign penal law. 8

9 'The principal difference between the requirements of the two Acts is the time limit imposed on registration which is 12 months from the date of the judgment under the 1920 Act and 6 years under the 1933 Act' In addition, either under The Administration of Justice Act 1920 (the 1920 Act) or the Foreign Judgments (Reciprocal Enforcement) Act 1933 (the 1933 Act) (together the Acts), an application can be made at the High Court for enforcement of judgments from certain jurisdictions. The countries covered by the Acts are principally former and current Commonwealth countries. When registered, such a judgment has the same force and effect as if it were a first instance judgment of the courts of England and Wales. The principal difference between the requirements of the two Acts is the time limit imposed on registration which is 12 months from the date of the judgment under the 1920 Act and 6 years under the 1933 Act. The judgment debtor may seek to set the application aside and in doing so he can make use of a wide range of defences similar to those available at common law. Conclusion When negotiating the governing law and jurisdiction provisions in cross-border legal agreements (particularly in relation to longer term arrangements, such as supply agreements or insurance policies) consideration should be given to the cost of, and the ease with, which a judgment may be enforced in the chosen jurisdiction should relations sour. Shares Sales - Recovery of input VAT Introduction There has been a series of cases before the European Court of Justice (ECJ) that have considered the recovery of input VAT in relation to transactions in shares and other securities. The cases include Polysar, Kretztechnik and Securenta. 'So far as the UK is concerned the position taken by HMRC is that VAT incurred in relation to share sales is regarded as irrecoverable other than in relation to a sale to a person outside the UK' So far as the UK is concerned the position taken by HMRC is that VAT incurred in relation to share sales is regarded as irrecoverable other than in relation to a sale to a person outside the UK. The latest case on the subject is Skatteverket v AB SKF Case C-29/08. This seems to indicate that HMRC's approach may be wrong. However, as is often the way with the ECJ, the decision appears to raise more questions than it answers. Background SKF was the holding company of an industrial group which carried on activities in a number of countries. It took an active part in the management of its subsidiaries. It supplied management, administration and marketing services to the group companies for a consideration. VAT was charged in respect of the consideration. SKF intended to dispose of the shares in two companies. One was wholly owned and SKF owned 26.5% of the shares in the other, which had previously been wholly owned. The reason for the disposals was to obtain funds to finance other activities of the group. In order to carry out the disposals SKF intended to engage the services of financial advisers in relation to valuing the shares, assistance with negotiations and specialised legal advice for the drafting of the contracts. 9

10 The supply of those services would be subject to VAT. In order to obtain clarification of the tax consequences SKF applied to the Swedish Tax Commission, which is distinct from the Swedish Tax Authorities, for a preliminary decision on the right to recover input VAT paid on the supplies. The Swedish Tax Commission held that in both cases SKF was entitled to deduct the input VAT paid. It took the view that the supplies of services supplied by SKF to the companies were part of an economic activity and that the VAT paid on the costs which SKF had incurred when those companies were acquired was deductible. In the same way the VAT paid on costs when that activity was brought to an end ought also to be deductible. In Sweden either party may appeal against a decision of the Swedish Tax Commission and the Swedish Tax Authorities appealed to the Swedish Supreme Administrative Court, which then referred four questions to the ECJ. The ECJ decision The four questions put to the ECJ were, in summary: 1) Are share disposals such as in this case transactions within the scope of VAT? 2) If within the scope of VAT, are they exempt? 3) Is the input VAT deductible? 4) Is the position different if the disposal of shares took place by way of several successive disposals? The ECJ concluded that the sale by a holding company of shares in a subsidiary to which it had supplied management services would be an economic activity within the scope of VAT, except where the transfer was to be treated as a transfer of a business as a going concern (TOGC). If it was not a TOGC then the sale of the shares would be an exempt supply; however, even though the sale was an exempt supply there would be a right to deduct input VAT if the transactions giving rise to the input tax were cost components within the seller's economic activity. The ECJ confirmed that there would be no difference whether there was a single transaction or a series of disposals. Implications of the decision As mentioned above, it would appear that the view taken by HMRC that VAT in relation to share sales is only recoverable where there is a sale of shares to a person outside the EU is incorrect. There has not yet been a considered response to the decision from HMRC and it is probable that HMRC will seek to restrict the scope of the decision. The judgment raises some difficult issues and it remains to be seen how the UK courts will implement the guidance given by the ECJ. 10

11 The decision indicates that a holding company that is involved in the management of a subsidiary and that makes supplies of services to it should be entitled to recover some or all of the input VAT incurred on the sale of the shares if the sale is a TOGC or even if it is an exempt supply but the costs of the sale are attributable to the overall economic activity or the parent. The suggestion that the sale of the shares in a company might be equated with the sale of a business and qualify for TOGC treatment was certainly a novel approach and not one that had been considered by UK tax advisers. Such an approach could give rise to difficulties. For instance, would it be necessary for the purchaser to carry on the same type of business? For example, if the seller was an active holding company would the buyer also have to be an active holding company? It seems likely that further litigation, probably involving visits to the ECJ, will be needed before there is any certainty as to application of TOGCs where share sales are involved. Conclusion Whilst the decision appears to improve the position of taxpayers so that there will be an entitlement to recover input VAT in respect of a share sale in appropriate cases it is not yet clear what those cases will be and further guidance from HMRC is urgently required. Further information If you would like further information on any issue raised in this update please contact: Richard Britain Tel: +44 (0) richard.britain@clydeco.com Trefor John (Tax) Tel: +44 (0) trefor.john@clydeco.com Clyde & Co 51 Eastcheap London EC3M 1JP Further advice should be taken before relying on the contents of this summary. Clyde & Co LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co LLP. Clyde & Co LLP is a limited liability partnership registered in England and Wales. Regulated by the Solicitors Regulation Authority. Clyde & Co LLP 2010 Clyde & Co LLP offices and associated* offices: Abu Dhabi Bangalore* Belgrade* Caracas Dar es Salaam* Doha Dubai Guildford Hong Kong London Moscow Mumbai* Nantes New Jersey New York Paris Piraeus Rio de Janeiro Riyadh* San Francisco Shanghai Singapore St Petersburg* 11