Pensions – new offences and sanctions for companies with defined benefit schemes

The Pension Schemes Act 2021, which comes into force on 1 October 2021, will introduce new criminal offences and financial penalties, and two new contribution notice triggers, where a company or group has a defined benefit occupational pension scheme (DB scheme). The government is also consulting on extending the pensions notification requirements.

Criminal offences and sanctions

The new criminal offences and civil sanctions are widely drawn and could apply to company directors, lenders, investors, sellers, purchasers, trustees and advisers who take action which, broadly speaking, is materially detrimental to a DB scheme, where they do not have a reasonable excuse for their actions.

  • Criminal offences – In broad terms, it will be a criminal offence to take action which avoids a “section 75” employer debt to a DB scheme, cause a material detriment to a DB scheme or fail to comply with a contribution notice. The sanctions for these offences include up to seven years imprisonment, an unlimited fine or both. In practice, these offences could apply in a wide range of circumstances including where:
    • a company takes on new security which ranks ahead of a DB scheme;
    • a profitable part of a business or its assets are sold; or
    • a dividend is paid to shareholders when a business is in distress.
  • Fines of up to £1 million – A civil penalty of up to £1 million could be imposed on directors and other parties in a range of circumstances, including where a person:
    • takes steps to avoid or reduce the amount of a “section 75” employer debt (for example, as a result of the sale of a group company), where it was not reasonable for the person to act in the way that they did; or
    • takes steps that are materially detrimental to the prospect of benefits being paid under a DB scheme, where it was not reasonable for the person to act in the way that they did.
  • New contribution notice triggers – There are two new trigger events under the Act. They will allow the Pensions Regulator to issue a contribution notice in respect of: actions that materially reduce the amount of employer debt likely to be recovered by a DB scheme on hypothetical insolvency (where the scheme has a deficit on a buy-out basis); or actions that reduce the value of the resources of a DB scheme’s sponsoring employer to a material extent. These trigger events could include:
    • a company taking on additional debt which ranks above a DB scheme in the event of the company’s insolvency;
    • a corporate restructuring;
    • the sale of a valuable part of a business; or
    • the payment of excessive dividends.

Further information on the new offences and sanctions can be found in our blog post here, and on the Pensions Regulator’s guidance on its approach to enforcing the offences in our blog post here.

Proposed changes to notification requirements

Under draft regulations, which are expected to come into force on 6 April 2022, a notification obligation would be triggered if there is a “decision in principle” by an employer with a DB scheme:

  • to sell a material part of the business or assets; or
  • to grant security which will rank ahead of the DB scheme.

The existing notifiable event relating to the relinquishing of control of a DB scheme employer is also being amended to bring forward the timing of the relevant notification so that, in future, it would arise when: there is a decision in principle by a controlling company to relinquish control of the employer company, or an offer to acquire control of the employer company, where the employer company has not made a decision in principle to relinquish such control. Failure to comply with these requirements could result in a fine of up to £1 million.

For further information, see our blog post here.

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Barnaby Hinnigan
Barnaby Hinnigan
+44 20 7466 2816

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

M&A – National Security and Investment Act in force from 4 January 2022

The Government has announced that the new National Security and Investment Act 2021 will come fully into force on 4 January 2022. This means that mandatory notification requirements will apply to relevant transactions completing on or after that date, and other transactions (including those which have already completed since 12 November 2020) may be the subject of the Secretary of State’s call-in powers as of that date.

The Act will overhaul the review of transactions and investments on national security grounds in the UK. The new regime represents an important new execution risk factor, with a similar risk profile to merger control rules (see the briefing we published when the Act received royal assent for more information).

The Government has also published four new pieces of guidance to assist business, investors and advisers:

The Government has also published a draft of the notifiable acquisition regulations, as well as a consultation draft of the Statement of Policy Intent.

For further information, see this blog post published by our Competition, Regulation and Trade team. We will publish a more substantive briefing in due course.

Gavin Davies
Gavin Davies
+44 20 7466 2170

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Alan Montgomery
Alan Montgomery
+44 20 7466 2618

M&A – Court of Appeal decision on the reasonable detail required in a claims notice

The Court of Appeal has held that a buyer’s notice of claim complied with the requirements under a share purchase agreement (SPA). In doing so it took into account the fact that the seller already had knowledge of the events leading to the claim.

At issue was whether the buyer’s notice contained “reasonable detail” of the matter, as required by the SPA. The Court of Appeal found that the notice did contain reasonable detail and so was valid. What is reasonable must depend on all the circumstances, but the court could take into account whether the recipient already had knowledge of the underlying events when determining whether sufficient information had been provided.

In cases such as this one, where there was a requirement to give “reasonable detail” and the recipient already had knowledge of all of the relevant information, a court should be “slow to reach” the conclusion that a notice was defective if it did not contain further information which would have served no useful purpose to the recipient.

It is important to note that whether a notice has been given in accordance with contractual requirements will turn on the precise contractual wording and the factual background to the dispute.

The decision (Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638) is discussed in more detail here on our Litigation Notes blog.

Barnaby Hinnigan
Barnaby Hinnigan
+44 20 7466 2816

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gavin Williams
Gavin Williams
+44 20 7466 2153

M&A – the new UK National Security and Investment Act 2021

The UK National Security and Investment Act 2021 has received Royal Assent and is expected to come into force later this year. However, as discussed further below, once in force it can apply to transactions being entered into now.

The Act will introduce significant legislative reforms which will overhaul the review of transactions and investments on national security grounds in the UK. The new regime represents an important new execution risk factor, with a similar risk profile to merger control rules.

We have been very closely involved in the passage of this legislation through Parliament, including giving evidence before the Bill Select Committee and Foreign Affairs Select Committee, suggesting amendments to the Bill, and successfully assisting members of the House of Lords in arguing for specific changes to the proposed regime.

The key points to note in relation to the new regime are:

  • Transactions in scope – The new regime will apply to an acquisition of “material influence” in a company (which may be deemed to exist in relation to a low shareholding, potentially even below 15%), as well as an acquisition of control over assets (including land and intellectual property), where the acquisition potentially gives rise to national security concerns in the UK.
  • Application to all buyers – It will apply equally to both UK and non-UK investors (although the Government has acknowledged that UK investors will be less likely to give rise to national security concerns in practice).
  • Application to entities/assets outside the UK – It may capture acquisitions of non-UK entities or assets in certain circumstances.
  • Mandatory notification – A mandatory notification obligation (and a corresponding prohibition on completion prior to clearance) will apply to certain transactions involving target entities which carry out specified activities in the UK in one of 17 sectors (including energy, transport, communications, defence, artificial intelligence and other tech-related sectors). Such transactions include the acquisition of a shareholding / voting rights of more than 25% (the threshold has been increased from the 15% or more proposed in the original Bill).
  • Power to call in transactions – The mandatory notification obligation will be combined with an extensive call-in power, enabling the Government to call in qualifying transactions for review, regardless of sector. The call-in power is not subject to any materiality thresholds in terms of target turnover or transaction value.
  • Voluntary notification  Acquirers will also have the option to voluntarily notify a qualifying transaction to obtain clearance, which may be advisable in the interests of legal certainty where potential national security concerns arise.

Formal commencement of the new regime will be delayed until later this year (exact date to be confirmed). However, the Government will have retroactive powers to call in for review at the commencement date (or potentially up to five years thereafter) any qualifying transaction completed between 12 November 2020 and the commencement date. This means that it is critical for investors to consider the potential application of the new regime for all transactions completed from 12 November 2020 onwards that could potentially raise national security concerns.

We have published an updated briefing on the regime which is available here.

Gavin Davies
Gavin Davies
+44 20 7466 2170

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gavin Williams
Gavin Williams
+44 20 7466 2153

New risks in M&A: EU’s revised Article 22 Referral Policy and Mitigation Strategies for Business

The European Union has adopted a bold new approach towards the use of the referral mechanism set out in Article 22 of the European Union Merger Regulation (“EUMR“). As a result, transactions which do not qualify for review under merger control regimes in Member States can now be referred to the European Commission for assessment and approval.

On 20 April 2021 the first referral under this revised system was accepted by the European Commission in relation to the acquisition of the US-based healthcare company GRAIL by Illumina, Inc. (“Illumina/GRAIL“).

This marks the beginning of a new chapter in merger control in Europe. Jurisdiction to assess mergers, whether at a national or EU-level, was formerly determined by applying bright-line tests which typically related to the turnover of merger parties in relevant jurisdictions. This provided a high degree of legal certainty, enabling businesses to identify in advance merger control clearances required for an envisaged transaction and evaluate related risks and timing implications for closing.

The revised use of the Article 22 referral system introduces considerable legal uncertainty and risk. It presents significant practical challenges for deal planning and execution. Merger parties will now need to consider the conditions for referral under Article 22 EUMR, assess referral risk and, in appropriate cases, consider means to mitigate such risks, for instance through informal consultation with competition authorities and the inclusion of appropriate conditions in transaction documents.

Completed transactions may be subject to referral and review under Article 22 EUMR, a notable departure from conventional practice under the EUMR.

These and other practical and strategic considerations are explored in this alert, as is the recent referral of Illumina/GRAIL.

Continue reading

Government response on National Security and Investment Bill consultation

The government has published its response to the consultation on the sectors where mandatory notification will be required under the proposed new national security screening regime contained in the National Security and Investment Bill.

The Bill was published in November 2020 (see our blog post here) and is currently making its way through the House of Lords. It is expected to enter into force in autumn 2021.

A wide range of stakeholders had expressed concerns that many of the sector definitions originally proposed in the consultation document were drafted too broadly, and in many cases were not sufficiently specific to enable acquirers to identify whether a particular transaction would fall within scope of mandatory notification.

The government has now published revised definitions for each of the 17 sectors, with a significant narrowing of scope in many areas.

We have published a briefing which gives an overview of the key changes made to each of the 17 sector definitions, and related next steps.

Mark Bardell
Mark Bardell
+44 20 7466 2575

Gavin Davies
Gavin Davies
+44 20 7466 2170

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

 

Pensions – implications of the Pension Schemes Act 2021 for corporates

The Pension Schemes Act 2021 introduces significant reforms of the regulatory regime for defined benefit (DB) pension schemes.

The Act introduces new criminal offences and civil sanctions which could be applied to company directors, lenders, investors, sellers, purchasers and advisers who take action which, broadly speaking, is materially detrimental to a DB scheme and where they do not have a reasonable excuse for their actions.

These new offences and sanctions are broad and have the potential to:

  • impact corporate activity, including M&A and the payment of dividends in certain circumstances;
  • restrict the scope for distressed businesses with DB pension schemes to secure fresh investment or take on additional debt, particularly where the scheme has a material deficit; and
  • impact the feasibility, manner and desirability of restructuring a business or group with a DB scheme.

These new powers are not expected to come into force until mid-2021 at the earliest to give the Pensions Regulator time to consult on and issue guidance on how and in what circumstances it plans to exercise them.

Our pensions team has published a briefing which discusses the implications of the Act in more detail.

Mark Bardell
Mark Bardell
+44 20 7466 2575

Julie Farley
Julie Farley
+44 20 7466 2109

Robert Moore
Robert Moore
+44 20 7466 2918

 

 

M&A in 2021 – Resilient, agile and coming off mute

We have published our new M&A report, which we have titled “M&A in 2021 – Resilient, agile and coming off mute”, here.

In it we look at the prospects for M&A in 2021 – whilst the significant regional and global questions from last year may not have gone away, there are reasons for optimism. Issues we discuss in the report include:

  • the lessons learnt from the impact of the pandemic that we are building into deal process and documentation, in particular around termination rights, for whatever black swan event next comes along;
  • the continued rise of FDI regimes and their deployment by governments in the pandemic;
  • the significance of shifts taking place in ESG, and the energy transition agenda in particular as a driver of M&A;
  • the rebound in activity in the public markets as bidders seek to take advantage of lower valuations; and
  • the distressed deals that we might expect to see in 2021, when governmental support necessarily runs out and the true impact is felt in the most damaged sectors.

Colleagues from our offices around the world also share their views and experiences of M&A in 2020, and their outlook for 2021.

 

Gavin Davies
Gavin Davies
+44 20 7466 2170

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Caroline Rae
Caroline Rae
+44 20 7466 2916

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

The regulatory regime for companies following the UK’s withdrawal from the EU

The UK ceased to be a Member State of the European Union on 31 January 2020. A transition period then applied until 31 December 2020. During the transition period, EU law continued to apply in and to the UK, and the UK continued to trade as part of the Single Market.

The Brexit transition period ended on 31 December 2020, with the EU and UK having agreed to the terms of their future relationship through a Trade and Cooperation Agreement – you can read more about the implications of the agreement here.

Retained EU law

As of 1 January 2021, EU law no longer applies in the UK. By virtue of the European Union (Withdrawal) Act 2018, directly applicable EU law in force in the UK at the end of the transition period is retained as part of the UK statute book. Retained EU law has broadly the same status as any other UK enactment and is subject to the same rules/processes for amendment as any other UK primary or secondary legislation (or if made under devolved powers, the rules of the relevant legislature in Scotland, Wales or Northern Ireland).

EU Exit statutory instruments

The Government has made secondary legislation dealing with a range of corporate law matters to ensure that both Retained EU law and existing UK law and regulation (for example that referenced EU concepts or bodies) could operate effectively once the transition period ended. These regulations include:

FCA Rules

The FCA has made a number of changes to its Handbook that apply with effect from the end of the Brexit transition period, including changes to the Listing, Prospectus Regulation, Disclosure Guidance and Transparency Rules.

The impact of the rule changes for UK incorporated companies which have securities admitted only to a UK regulated market will be minimal. Issuers which have shares admitted to a regulated market in the UK and in an EEA state will have to adjust their systems and controls and, for example, make additional notifications to regulators for certain matters, including in relation to PDMR transactions.

Takeover Code

The Takeover Panel has similarly made a number of changes to the Takeover Code that were required as a result of Brexit. The changes will not have a significant impact on transactions.

 

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Barnaby Hinnigan
Barnaby Hinnigan
+44 20 7466 2816

Roddy Martin
Roddy Martin
+44 20 7466 2255

What does the UK’s new national security investment screening regime mean for investors?

On 11 November 2020 the UK Government introduced the National Security and Investment Bill (NSI Bill) to Parliament, setting out significant legislative reforms which will overhaul the review of transactions and investments on national security grounds in the UK, against a backdrop of tightening of foreign direct investment (FDI) regimes globally. Continue reading