General updates

Tax: Classification of shares with no dividend rights; be aware of the tax position.

Many companies have issued shares which do not have any dividend rights, or at least, the right to a dividend is deferred on the basis of an employee’s performance or the length of time the shares are held. Although each company will have their own reason(s) for issuing such shares it is important to note the recent court decisions which deal with how these types of shares are classified:-

1. Deferred shares with no voting rights, no dividend rights & no realistic prospect of distribution on the winding up of the company? These shares would constitute ordinary share capital; and
2. Redeemable shares with no entitlement? These shares would be classed as fixed rate shares and would, therefore, not constitute ordinary share capital.

The above classification of shares is important where it is necessary to work out the ordinary share capital of the company and what percentage is held by a taxpayer, and in particular, where that taxpayer is seeking to take advantage of Entrepreneurs’ Relief.

Contract Law

Attempt to prevent oral variation?

It may seem like an attractive proposition to include in a contract a clause which precludes any later oral variation, a so called ‘anti-oral variation clause’. The purpose of such a clause is to attempt to remove the uncertainty of subsequent changes to the contract being implemented by the parties’ conversations. However, the Court of Appeal has recently confirmed in that such a clause would not, in theory, preclude the parties from subsequent oral variation.

Can a contract be executed by electronic signature only?

This question has recently been tested in the courts and the short answer is that a contract can be executed by electronic signature only. However, this must be dealt with in a way which is valid in order for the contract to be enforceable. In this case, whether or not the contract was enforceable hinged on whether or not it had been executed by the party using their email account to agree to give a guarantee. The judge found that merely sending the guarantee using the party’s email address (which included the name of the party in the automated footer) was not sufficient. However, it was held that had an electronic signature been incorporated beneath the guarantee text or even if the name had been intentionally typed then this would have been a validly executed contract

Non-Compete Clauses; a stumbling block for innovation and entrepreneurship?

The Government has launched a call for evidence into the use of non-compete clauses to determine whether or not they have a negative effect on innovation and entrepreneurship.

Passing off; the importance of evidence of consumer reliance

A recent case has highlighted the importance of consumer reliance in identifying a business by a design or particular combination of designs. In this case a former employee of a company set up a competing retail business using the same colour scheme and the same shapes and names for three sofas. Despite this, the passing off claim was dismissed on the basis that there was no evidence that customers relied on those factors to identify the defendant’s store. There cannot be a successful claim for passing off without evidence of misrepresentation, i.e. whether or not customers are confused between two brands.

Be aware; Government looking to increase custodial sentence for online copyright infringement.

In July 2015 the government launched a consultation into proposed changes to the maximum custodial sentence for online copyright infringement. The government wants to increase the maximum sentence to ten years imprisonment. Currently the maximum sentence for an online copyright infringement is only two years. Those consulted overwhelmingly rejected the proposal. However, it is understood that the government is still pursuing this and intend to reintroduce an amended proposal at the earliest legislative opportunity. This means that online copyright infringement could soon lead to a decade behind bars!

Company Law

Amendment of company articles by conduct

The High Court has recently considered whether or not it is possible to amend a company’s articles by conduct alone. In brief, the case facts were that a company’s articles required a person to be a member of the company before they could become a director, but this requirement had been waived by the existing directors on several occasions. It was held that the conduct could lead to the amendment of articles, and that the director had been appointed (however this was only valid until the date of the next AGM). The company was deemed to have validly amended the articles by conduct alone. It was said that their conduct meant they had removed the qualification from the articles which required a director to first be a member.

Statutory Duty to Report

The UK government has been driving forward proposals to tackle late payment in business to business contracts.

The government is encouraging large companies to lead by example in paying their suppliers promptly and fairly, with 30 day payment terms being the norm and 60 days the maximum. It also intends for companies to receive penalties for poor payment practices.

The government announced that the proposed ‘duty to report’ on payment practices and policies will apply to large private companies, large LLPs and large quoted companies.

The statutory duty to report, introduced by the Small Business, Enterprise and Employment Act 2015 (implementing Part 1 clause 3 (Companies: Duty to Publish Report on Payment Practices) (‘the Act’), is due to come into force from 6 April 2017.