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Following on from my recent article on Managing Risks Related To Offshore Accounts and Tax Havens, I wanted to discuss the tax evasion offences relating to such arrangements.

In addition, this article will consider the difference between aggressive tax avoidance and tax evasion, and when that line is crossed in cases where wealth is placed offshore.

The first offences to consider are those provided for by the section 166 of the Finance Act 2016.

What are the offences under section 166 of the Finance Act 2016?

Section 166 of the Finance Act 2016 creates new offences under sections 106B, 106C and 106D of the Taxes Management Act 1970, namely:

• Failing to give notice of liability to income tax or capital gains tax.
• Failing to deliver a return.
• Failing to make an accurate return regarding offshore income, assets, or activities.

It is important to be aware that these are ‘strict liability’ offences, meaning the Prosecution does not have to show you dishonestly intended to evade paying tax, omitting to give notice or accurate information concerning offshore income, assets, or activities is enough to gain a conviction.

The offences will only apply to income tax and capital gains tax; however, all offshore income and gains are included, not just under-declared investment returns. If the total of the relevant unreported tax is under £25,000 for a particular year, no offence is committed. This signifies that in bringing in the legislation, the UK Government was not concerned with what it considers ‘minor amounts’. The offences are aimed at those who have significant income and/or assets located offshore.

The offences also do not apply:

• You were acting as a trustee of a settlement, or as executor or administrator of a deceased person, or
• You reported your offshore income or capital gains to HMRC under the Common Reporting Standard (CRS).

What are the defences available under section 166 of the Finance Act 2016?

If you can show you took reasonable care when submitting your return or had a reasonable excuse for failing to comply with your UK tax obligations, you will have a defence. But this does not mean you automatically escape conviction. The Courts will consider your circumstances, ability, knowledge, and experience. So, if you are wealthy, educated, with access to considerable support in terms of professional advisors, you will need to provide a persuasive and detailed argument that you took reasonable care or had a reasonable excuse.

The offences under section 166 and the crime of tax evasion and tax fraud (discussed in a previous article) are relatively straightforward in terms of what the Prosecution must prove. And although a defence can and often is built on the lack of dishonest intent by the Defendant, there is another grey area where a defence to tax evasion/fraud can be plucked from – was the Defendant engaging in tax evasion or aggressive tax avoidance, the latter of which may or may not be illegal? An example of this can be found in the 2015 HSBC scandal.

What was the HSBC scandal involving offshore accounts and tax avoidance?

Section 166 was introduced following the public outcry regarding the revelation that the UK- headquartered bank, HSBC, allegedly helped those holding offshore Swiss accounts, undertake tax avoidance and evasion. The International Consortium of Investigative Journalists (ICIJ) unearthed evidence of the bank providing large amount of untraceable bricks of cash in foreign currencies, colluding with clients to conceal ‘black accounts’ from tax authorities, and using “how to avoid the European Tax Savings Directive” information as a marketing strategy.

In her article, The Relationship Between Offshore Evasion and ‘Aggressive’ Tax Avoidance Arrangements: The HSBC Case, Iulia Nicolescu states that aggressive tax avoidance and tax evasion are seen as broadly the same in the court of public opinion. The Government is also alive to this and has sought to separate out the definitions of ‘tax avoidance’ and ‘tax planning’ as illustrated below.

Clarifying tax terminology

Tax evasion is always illegal. It is when people or businesses deliberately do not declare and account for the taxes that they owe. It includes the hidden economy, where people conceal their presence or taxable sources of income.

Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law. Most tax avoidance schemes simply do not work, and those who engage in it can find they pay more than the tax they attempted to save once HMRC has successfully challenged them.

Tax planning involves using tax reliefs for the purpose for which they were intended, for example, claiming tax relief on capital investment, or saving via ISAs or for retirement by making contributions to a pension scheme. However, tax reliefs can be used excessively or aggressively, by others than those intended to benefit from them or in ways that clearly go beyond the intention of Parliament. Where this is the case it is right to take action, because it is important that the tax system is fair and perceived to be so.”

Aggressive tax avoidance is frowned upon by the Government and cases may be heard in court to decide whether the avoidance is manipulating the law in a way that does not represent the Government’s intentions towards tax. However, following the HSBC scandal, only one person was prosecuted. HMRC admitted that putting together a court case took years, and it was quicker and cheaper to try to recoup the lost tax rather than prosecute the bank.

Wrapping up

If you feel after reading this article that there are no clear answers when it comes to tax evasion offences and offshore accounts other than what is provided for under section 166 of the Finance Act 2016, that is because unambiguous law regarding tax avoidance is difficult to create. Governments must tread a fine line between collecting revenue and assuring the public that high-net-worth people are paying their fair share, and the need to encourage investment and not send the wealthy, with their considerable spending power and already high tax contributions, fleeing to more tax-friendly shores.

Being investigated or prosecuted for tax fraud or tax evasion is incredibly serious, and if you are convicted, you could go to prison. Our Tax Fraud Solicitors have extensive experience in successfully defending complex tax fraud cases and will provide the advice and representation you need to manage an HMRC investigation or prosecution.

To discuss any points raised in this article, please call +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: This article does not constitute legal advice. For further information, please contact our London office.

What is a crypto wallet?

Crypto wallets do not store physical currency. Instead, it contains the digital passkeys you use when signing for crypto transactions and provides an interface that allows you to access your crypto assets. A crypto wallet also makes blockchain accessible, by entering in long keys which previously, you would have had to do yourself.

A straightforward way to think of a crypto wallet is to imagine a piece of software that finds all your bits of crypto asset data scattered across a database by using your public address. Once collected all the assets that belong to you, it totals up the amount and presents it on an app interface.

Crypto wallets come in two forms, custodial and non-custodial.

• Custodial wallets – an exchange where you can buy and sell cryptocurrency holds the passkey to your wallet on your behalf.
• Non-custodial wallets – you, as the user, have complete control over your passkey and direct interaction with the blockchain.

There are also two types of crypto wallets.

• Hot wallets – where your wallet is kept on an application or platform residing on the internet.
• Cold wallets – where your wallet is stored offline, sometimes in a physical device such as a thumb drive.

Both options differ in experience and security levels. For example, cold storage may offer more security as it is offline; however, most hot storage options are free to use.

How does a Crypto Wallet Freezing Order work?

The Economic Crime and Corporate Transparency Act 2023 introduced CWFOs and Crypto Wallet Forfeiture Orders CWForOs. CWFOs closely model Account Freezing Orders (AFOs) which was introduced by the Criminal Finances Act 2017.

As of 24 April 2024, Prosecutors and enforcement authorities in England and Wales can apply to a Magistrates’ Court for a CWFO where they have reasonable grounds to suspect cryptoassets held in a crypto wallet administered by a UK-connected crypto service provider represent the proceeds of unlawful conduct or are intended for use in unlawful conduct.

A subsequent CWForO can be made if the Court is satisfied, on the balance of probabilities, that the crypto assets connected with the wallet are the proceeds of criminal conduct or intended to be used for criminal purposes.

As is the case with AFOs, it is likely that most applications for CWFOs will be granted at the first hearing. This is because:

1. Magistrates seldom question an enforcement agency’s assessment regarding whether the Respondent’s assets relate to criminal conduct, and
2. In the case of crypto wallets, Magistrates are unlikely to have the technical knowledge to challenge the enforcement agency’s conclusions.

Holding a non-custodial wallet in cold storage can hamper the effectiveness of CWFOs as the wallet may not be connected to a UK service provider. However, cold and non-custodial wallets can still be identified over the on/off ramp interactions with (centralised) service providers.

Another challenge to the effectiveness of CWFOs is the rise of Decentralised Exchanges (DEX) and privacy first Blockchain protocols. These could make the successful application of CWFOs practically impossible.

Can CWFOs be granted without notice?

Yes, they can be granted without notice to the owner of the wallet or any other affected party.

How can a Solicitor help?

If the CWFO has been granted without notice, it is unlikely you will be aware of its existence until it is served on you. At this point, you need to contact an experienced Corporate Crime Solicitor immediately. They will work swiftly to gather the relevant evidence regarding the use and origin of the crypto assets. In addition, your Solicitor will collate and present this evidence in a way that can be understood by a Magistrates’ bench which may comprise of mostly lay people.

Although the standard of proof a CWFO application (reasonable grounds to suspect) is incredibly low and therefore likely to lead to a without notice application succeeding, obtaining a CWForO requires a higher standard of proof (balance of probabilities). Your Solicitor will contact and build a relationship with the enforcement agency or Prosecutor so they can develop an understanding as to why they suspect your crypto assets have been used for or gained through criminal activity and the actions they plan to take to continue their investigations.

If the CWFO remains in force whilst the investigation takes place, your Solicitor will focus on building a robust case aimed at convincing the investigator or the Court that the suspicion upon which the CWFO was granted is unsustainable.

Final words

Lack of judicial knowledge and confidence is the greatest difficulty facing clients and legal professionals alike when it comes to successfully challenging an application for a CWFO. Therefore, you, as the client need to instruct a Solicitor who understands the new and specialist area of crypto assets to ensure legal arguments and evidence supporting a challenge is presented in plain English and an understandable format, thus giving it the best chance of success.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect the law in place at the time of writing, 21 December 2024. This article does not constitute legal advice. For further information, please contact our London office.

What is a tax haven?

When asked about tax havens, most people think of sunny Caribbean Islands. However, Hong Kong, Gurney, Jersey, Luxenberg, and the Isle of Man are all well-known tax havens and none of these countries are renowned for their good weather. Another misconception about tax havens is that they are a product of recent capitalism and globalisation. In fact, historians have found evidence of the ancient Greeks using isolated islands for tax haven purposes.

Regardless of the climate and modernity, what tax havens have in common is they offer low or no tax liability to foreign businesses and people to attract external investment. There is no strict definition of a tax haven; however, the Organisation for Economic Cooperation and Development (OECD) states that they all have the following common factors:

• No, or low tax on relevant income.
• Strict financial privacy laws.
• Little transparency.

The most cited research on tax havens is the Hines-Rice paper, created by James R. Hines Jr. and PhD student Eric M. Rice. It states that the differences in tax havens meant it was impossible to provide a blanket definition, beyond the requirement for low effective tax rates.

Is it illegal to have an offshore account in a tax haven?

Despite their shady reputation, placing funds in an offshore account in a known tax haven is perfectly common and can be completely legitimate. Examples of a legal use of offshore accounts include:

• You are an ex-pat or dual-citizen of the country where the account exists and any income entering the account is properly declared for tax purposes.
• You own a business that operates in the country where the account sits, and you declare any income to HMRC. The same applies to any commercial or rental property that you rent out.
• You declare any interest on the funds contained in the account to HMRC.

You do need to be careful and seek regular, professional advice when operating an offshore account because, similar to tax evasion and tax avoidance, the line between legal and illegal when it comes to depositing money in a tax haven is easily crossed.

When is using an offshore account in a tax haven illegal?

If you are using an offshore account based in a tax haven to conceal income or assets that you would normally have to pay tax on, you could be committing tax fraud or tax evasion.

For example, if you live in the UK and sell a property in the Cayman Islands and fail to declare the profit made to HMRC to avoid paying Capital Gains Tax, you could be committing an offence. This is an extremely simplistic example, the world of offshore banking, shell companies, and cross-border asset transfers is incredibly complex. It is for this reason that Governments spend a great deal of resources to unearth offshore accounts used for tax evasion.

How does the UK Government detect possible offshore tax evasion or tax fraud?

HMRC uses domestic and international intelligence to detect if a company or person is using an offshore bank account in a tax haven for illegal purposes. For example, the Organisation for Economic Co-operation and Development’s (OECD) agreement, titled the Common Reporting Standard (CRS) provides global visibility of the offshore financial accounts of taxpayers. HMRC currently receives information on around nine million accounts from over 100 jurisdictions. Other international agreements include:

• Reporting Rules for Digital Platforms, which came into force from 1 January 2024. Digital platform operators must now report information on people selling goods and services via their platform to tax authorities and sellers. 
• Crypto-Asset Reporting Framework (CARF), to be implemented for the collection of information from 2026 and its exchange from 2027. The Framework will provide automatic exchange of information on ownership of, and transactions in, crypto assets, which are not covered by the CRS. See FAQ.

Domestically, the People with Significant Control Register provides publicly available information regarding who has beneficial ownership of a particular company. And in 2022, the Register of Overseas Entities was introduced. This provides HMRC information regarding beneficial ownership on people and entities using complex offshore structures to own and benefit from UK property.

Concluding comments

Although using an offshore account in a recognised tax haven can be perfectly legal, doing so can make you vulnerable to HMRC investigations. Our Tax Fraud Solicitors have extensive experience in managing these types of situations, as well as successfully defending complex tax fraud cases.

In part two of this series of articles, we will examine the various offences linked with offshore accounts and the defences available.

To discuss any points raised in this article, please call +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect the law in place at the time of writing, 20 December 2024. This article does not constitute legal advice. For further information, please contact our London office.

Carey Street Investments Ltd (In Liquidation) v Brown [2024] EWCA Civ 571

In the recent case of Carey Street Investments Ltd (In Liquidation) v Brown, the Court of Appeal ruled that the trial judge had been correct in finding that there was no evidence the director of two companies had, in breach of his director’s duties and with a view to evading corporation tax on capital gains, agreed to the transfer of two London properties to their parent companies at a substantial undervalue.

Carey Street Investments Ltd (In Liquidation) v Brown deals with two vitally essential matters directors of companies must concern themselves with, namely directors’ duties and tax law, particularly the difference between tax avoidance and tax evasion (the former being legal, the latter carrying a custodial sentence).

Before looking at the facts of Carey Street Investments Ltd (In Liquidation) v Brown, it is helpful to outline the law briefly as it relates to tax evasion.

What is tax evasion?

Tax evasion is the deliberate non-payment of tax, for example, not declaring taxable income and accepting cash-in-hand payments. This is in contrast to tax avoidance, which involves averting paying taxes through legal methods, such as setting up offshore companies or trusts to avoid paying UK taxes.

The Taxes Management Act 1970 (TMA 1970) provides for the offence of income tax evasion. Section 106A states that a person commits an offence if they are knowingly concerned about the fraudulent evasion of income tax by themselves or another person. The offence does not apply to things done or omitted before 1 January 2001.

Other ways a person can defraud HMRC or the Department for Work and Pensions (DWP) include:

• Making a false statement (whether written or not) relating to income tax.
• Delivering (or causing to be delivered) a false document relating to income tax.
• Failing to account for VAT.
• Withholding PAYE and National Insurance.
• Failing to register for VAT.
• Failing to disclose income.

Along with statutory offences, there is a common law offence of cheating the public revenue.

The majority of tax evasion offences require individuals to engage in fraudulent conduct, implying an act of dishonesty. This might involve using false invoices to decrease the taxable profits of a business or knowingly understating income in an annual return.

The test for dishonesty is:

• What was the Defendant’s actual state of knowledge or belief as to the facts?
• Irrespective of the Defendant’s belief about the facts, was their conduct dishonest by the objective standards of ordinary decent people?

Dishonesty is a key element of tax evasion offences and must be proved if the Prosecution is to achieve a criminal conviction.

The facts in Carey Street Investments Ltd (In Liquidation) v Brown

The Claimant companies were both in liquidation and owed substantial debts to HMRC. They brought a claim against the director of both companies, alleging he had transferred property to their parent companies at a substantial undervalue in breach of his director’s duties with a view to evading tax.

The claim was time-barred unless section 21 of the Limitation Act 1980 applied. Section 21 provides that generally, the limitation period for breach of trust is six years from the date of breach.

Mr Robin Vos sitting as a Deputy High Court Judge dismissed the claim.

On appeal, the Court concluded that the Deputy High Court Judge reasoned that the properties were transferred at what the Director believed were the correct market values. He therefore made findings of fact taking this into consideration. Looking at the judgment as a whole, it was clear that the Deputy High Court Judge did not proceed on the basis that there was no possibility of the Director having been dishonest. Instead, he reasoned that upon examination of the Director’s motivations as a whole, that the Director acted in a way that he believed was in the Claimant companies’ best interests.

The Court of Appeal concluded that it had no basis to interfere with the Deputy High Court Judge’s decision. It was also unable to contradict his decision that the Director did not deliberately organise independent valuations of the properties in question out of fear that this would confirm they were worth more than he sold them for.

Final words

Although the Court of Appeal acknowledged that a different judge may have come to an alternative conclusion on the facts, it was not for the Court of Appeal to contradict Mr Vos’s findings. This case highlights that an appeal court cannot overturn a lower court’s decision merely because it might have reached a different conclusion given the factual circumstances. Instead, there must be some mistake in the way the law was applied or the law itself to justify such a decision.

 

To find out more about how our Company Law Solicitors can help you with disputes regarding directors’ duties, tax evasion allegations, or any other company law matter, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 30 November 2024. This article does not constitute legal advice. For further information, please contact our London office.

What are directors’ duties?

All company directors must comply with the directors’ duties set out in Chapter 2 of Part 10 of the Companies Act (CA) 2006. These are:

• To act within powers.
• To promote the success of the company.
• To exercise independent judgment.
• To exercise reasonable care, skill, and diligence.
• To avoid conflicts of interest.
• Not to accept benefits from third parties.
• To declare any interest in a proposed transaction or arrangement with the company.

Other directors’ duties may be included in the company’s Articles of Association (Articles), Shareholders’ Agreement, and Director’s Services Agreement.

Can a director be removed for breaching directors’ duties?

The first thing to remember when considering removing a director is that directors’ duties are owed to the company; therefore, it is the company that can enforce them, and its members (shareholders) cannot. Members can seek legal advice on bringing a derivative claim or a claim under section 994 of the Companies Act 2006 for unfair prejudice.

The methods for removing a director for breach of directors’ duties are as follows:

Articles of Association (Articles)

The first thing to check is the company’s Articles.

This is effectively your company’s rule book and sets out how the company should run. Articles will either be drafted so they are tailored to your specific organisation or ‘Model Articles’, which can be downloaded from the internet.

Article 18 of the Model Articles provides that a person will cease to be a director of a company if:

(a) that person ceases to be a director by virtue of any provision of the Companies Act 2006 or is prohibited from being a director by law;

(b) they are made bankrupt or similarly insolvent;

(c) a doctor states in writing that they are physically or mentally incapable of acting as a director and will be so for three months or more;

(d) they resign.

If your company has bespoke Articles, they may set out other reasons for a director’s removal, such as gross misconduct or breach of statutory duties.

It is also important to check if the company has a Shareholders’ Agreement and/or Director’s Services Agreement, as these may also provide reasons and methods for a director’s removal.

Ordinary resolution

Under section 168 of the Companies Act 2006, a director can be removed following a 51% majority vote in favour (ordinary resolution). To do this, the Board will need to send out a Special Notice of the proposed removal at a shareholders meeting. Special Notice requires that members must give notice of the meeting to the company at least 28 days before the meeting takes place.

The director is entitled to be told of the shareholders’ meeting and their proposed removal. They should be given the opportunity to make written representations to the company’s members in support of their position. They can also ask that these be read aloud in the meeting if it is not possible to circulate them beforehand. The director should also be permitted to speak at the meeting.

Removal by the Court

If shareholders make a successful application for unfair prejudice under section 994 of the Companies Act 2006, the Court has a wide range of remedies it can apply, including removing the director. However, the Courts have traditionally been reluctant to apply this remedy so it is important to talk to your Solicitor about other ways to remove the director or whether it is best to seek a declaration (see below).

Resignation

Provided the Articles, Shareholders’ Agreement, and Director’s Services Agreement do not say anything to the contrary, a Director can resign from their position at any time and are not required to give a notice period.

Removing a director in practice

In our experience, by the time a decision is made to remove a director, the relationship between them and the company’s members has completely broken down. If this is the case, rather than engage in back and forth accusations, members simply want to get the director out of the company so they can move forward. By seeking legal advice early on, removing a director can happen swiftly.

In the case of Abaidildinov v Amin [2020] EWHC 2192 (Ch), Eldwick Law Partner, Jenna Kruger, successfully advised the Claimants in applying to the Court for a declaration that the Defendant, who was a director of London Infrastructure and the holder of 42% of the company’s shares, ceased being a director of the company on 30 March 2020 following resolutions passed at the meeting of London Infrastructure Ltd’s board of directors on 3 March 2020, or alternatively on 30 March 2020.

Getting Legal Help

To find out more about how our Company Law Solicitors can help you with removing a director or any other company law matter, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 20 November 2024. This article does not constitute legal advice. For further information, please contact our London office.

Earlier this year, in Saxon Woods Investments Ltd v Costa & Oths [2024] EWHC 387 (Ch), a minority shareholder (P) brought a Petition under section 994 of the Companies Act 2006 asking the High Court to decide on whether a company had breached terms in the Shareholders’ Agreement requiring the company and its shareholders to work together in good faith towards a sale of the company.

Background to the case

A Shareholders Agreement (“SHA”) was entered into between the Eighth Respondent, Spring Media Investments Limited (“the Company”) and its shareholders (including P and investment entities for the First Respondent) to the effect that:

• They would work together in good faith towards a sale of the Company (“Exit”) by 31^st December 2019.
• Good faith consideration would be given to any opportunities for a sale before that date.
• In the event that no Exit was achieved by 31^st December 2019, the Company’s Board should instruct an investment bank to “cause” an Exit.

All efforts to sell the company failed and the company remained unsold at the time of trial.

P argued that the Company, and in particular, the First Respondent, breached the SHA by not acting in good faith towards the Exit. When the 2019 deadline passed, they should have engaged an investment bank to cause the sale of the company.

The First Respondent, a director and indirect investor in the Company, argued that on true construction of the SHA, no breach occurred. He also stated that even if this was not the case, the Board did not consider that selling the company by the end of 2019 would maximise the value for shareholders and therefore, the decision did not constitute a breach.

This meant that P did not suffer any unfair prejudice under section 994(1) of the Companies Act 2006.

 Section 994(1) of the Act provides as follows:

“A member of a company may apply to the court by petition for an order under this Part on the ground-

(a)  that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b)  that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

The High Court’s Decision

The Court ruled that the First Respondent had breached the SHA concerning the Exit. Having examined the disputed clauses of the SHA, Mr Simon Gleeson (sitting as a Deputy High Court Judge) concluded that:

• The SHA imposed a timetable for selling the company.
• The directors would not have been in breach of their fiduciary duties if they had pursued a sale in 2019, as they were obligated to under the terms of the SHA.
• A director’s conclusion that it would be commercially reasonable to defer the sale beyond the end of 2019 was not be permitted by the terms of the SHA.

Mr Gleeson went on to say that Clause 6.2 of the SHA demands two things:

1. to work in good faith towards an Exit, and
2. to give good faith consideration to offers for an Exit received during the investment period.

The First Defendant argued that the Company was not ready for sale by 31^st December 2019 and it would have been sold for a low price if the sale was realised on that date. Mr Gleeson determined that this point was irrelevant. The issue was whether the Company and the directors, and in particular the First Defendant, did in fact work towards an Exit on that date, and give good faith consideration to any opportunities for Exit which arose at that time.

Mr Gleeson concluded that the directors did not give good faith consideration to all Exit offers. In particular, the First Defendant rigidly controlled access to the financial advisor overseeing the sale process. He would not let others communicate with the financial adviser and intentionally excluded one minority shareholder from the process by withholding information. The First Defendant also did not properly engage with a potential sale opportunity proposed by the minority shareholder.

The Court concluded that the First Defendant’s actions amounted to a breach of the SHA, and he did not act in good faith with regard to working towards an Exit at the time agreed upon and did not pursue other investment opportunities that were presented to him. Therefore, P had suffered unfair prejudice as it could not sell its shares as it intended under the SHA. The Court consequently ordered the shares to be purchased.

Comment

It is rare for these types of cases to reach court; typically, an early settlement is reached. It is essential to note the lesson from the case is that although directors must be commercially astute and put the interests of the company first, if a Shareholders’ Agreement exists, the obligations under it must be seriously considered. If tension develops between commercial reality and contractual obligations, directors should seek expert legal advice straight away.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 30^th October 2024. This article does not constitute legal advice. For further information, please contact our London office.

How To Remove Minority Shareholders

The Companies Act 2006 (CA 2006) contains provisions enabling or requiring a takeover offeror to acquire shares of the target company from shareholders who have not accepted the offer. These provisions are referred to as:

• Squeeze-outs – an offeror has the right to compulsorily purchase the shares of non-assenting shareholders.
• Sell-outs: the non-assenting shareholders’ rights to require the offeror to purchase their shares.

Why is it necessary to remove minority shareholders?

Dissenting minority shareholders can cause significant problems for an offeror because:

• Unless the offeror achieves a shareholding of 75% or more, it may not be able to pass a special resolution.
• A 75% or more holding is required to incorporate the target company into its UK tax grouping for certain tax and stamp duty reliefs.
• Merger relief will only apply if the offeror has a 90% shareholding.
• An offeror can only call a general meeting at short notice if it holds 90% of the shares in a private company or 95% if the target company is public.
• Any minority interest may need to be considered when structuring intra-group transactions following the offer.
• Disgruntled minority shareholders can disrupt company business and cause reputational damage.

Dissenting shareholders can also suffer disadvantages in takeover situations. If the target company does not keep its public listing, minority shareholders may discover no one wants to purchase their shares. If this happens, they can be left with only the negative protections against unfair prejudice under section 994 of the CA 2006 and minority shareholder rights at common law.

How do squeeze-outs and sell-outs work?

In a squeeze-out, section 979 of the CA 2006 allows the offeror in a takeover bid to buy the shares of minority shareholders if they have acquired:

(a) not less than 90% in value of the shares to which the offer relates, and

(b) in a case where the shares to which the offer relates are voting shares, not less than 90% of the voting rights carried by those shares.”

If these conditions are met, the offeror can force minority shareholders to transfer their securities at the price offered in the takeover bid.

It is crucial to note that section 979 only applies if there is a takeover offer. A takeover offer must:

• Include an offer for the entire share capital of the target company or, if the target’s share capital is divided into classes, all the shares of the particular class which is the subject of the offer.
• Aside from a few exceptions, offer the same terms to all shareholders (or shareholders of the relevant class).

The offeror must activate the compulsory squeeze-out procedure within three months of the last day on which the offer can be undertaken. The procedure is initiated by the offeror serving notice to those members who have not accepted the offer.

Can a minority shareholder challenge a squeeze-out?

Once notice under section 979 is served a minority shareholder has six weeks to apply to the Court for a declaration that either:

1. The offeror is not entitled to their shares, or
2. The different terms on which the shares can be purchased.

If the 90% threshold has been reached, it will be difficult for a minority shareholder to prevent compulsory acquisition of their shares. But if they can prove, on the balance of probabilities, that the offeror breached the principles set out in the City Code on Takeovers and Mergers (also known as The Takeover Code) or there are special or unusual circumstances that mean a decision should be made in their favour, the Court may allow the application.

What are sell-out rights?

Section 983 of the CA 2006 provides that if an offeror holds 90% or more of all the shares in the target company (or if the offer relates to a class of target company shares, 90% of all the shares in that class) and those shares carry not less than 90% of the voting rights in the target, then a minority shareholder may require the bidder to acquire its shares.

The offeror must give formal notice that they have the right to request their shares be purchased by the offeror within one month of the 90% threshold being reached. If the sell-out notice is given before the end of the period within which the takeover offer can be accepted, it must state that the sell-out offer is still open for acceptance.

A sell-out notice does not have to be given if the shareholder in question has already been provided with a squeeze-out notice.

Concluding comments

Squeeze-outs and sell-outs can present serious complications in takeover bids, and failing to give minority shareholders notice at the right time can be an offence. The best way to protect your interests is to work with an experienced Shareholders Disputes Solicitor who can guide you through this and other complex matters associated with takeover bids.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 21^st October 2024. This article does not constitute legal advice. For further information, please contact our London office.

MUR Shipping BV v RTI Ltd [2024] UKSC 18

The current geopolitical situation means companies are increasingly having to rely on force majeure clauses to cope with supply chain issues and sanctions. The UK Supreme Court recently delivered its anticipated decision in MUR Shipping BV v RTI Ltd, which clarified that unless the parties clearly agreed otherwise, a “reasonable endeavours” provision in a force majeure clause did not require a party to accept non-contractual performance.

Background to the decision

The case concerned a freight contract (the contract) between MUR Shipping BV and RTI Ltd. RTI agreed to ship, and MUR agreed to carry, consignments of bauxite from Guinea to Ukraine.

Under the contract, payments were to be made in USD. MUR Shipping BV invoked the force majeure clause when US sanctions hindered RTI from being able to pay in the agreed currency.

The criteria for a “force majeure event” included an event or state of affairs that could not be overcome by reasonable endeavours made by the party affected.

The force majeure notice was served on 10 April 2018. RTI rejected the notice and offered to pay MUR Shipping in Euros instead and to cover all the exchange costs. MUR Shipping rejected this offer and suspended performance.

RTI commenced arbitration in June 2018. The Tribunal found that the consequences of US banks’ risk-averse reaction to sanctions were unavoidable, and any USD payments made by RTI would have been, at the very least, delayed. However, the Tribunal concluded that accepting payments in Euros was a viable alternative and would have resulted in zero detriment to MUR Shipping. Therefore, the force majeure “failed because it could have been overcome by reasonable endeavours from the party affected,” and MUR Shipping therefore had to pay damages.

On appeal, the High Court rejected the Tribunal’s decision and held that “reasonable endeavours” could not include accepting payment in Euro rather than USD.

The Court of Appeal (by a majority) allowed RTI’s appeal and reversed the High Court’s decision. Lord Justice Males said the force majeure clause should be applied in a “common sense way” which achieved the purpose of the agreement and allowed the parties to undertake their contractual obligations.

The Supreme Court’s decision

The SC overturned the Court of Appeal’s ruling and allowed MUR’s appeal. It held the ‘reasonable endeavours’ clause included in the force majeure clause did not require a party to accept the contract to be performed in a way that was not stipulated in the agreement. An essential element of freedom of contract is the freedom not to contract. Therefore, it follows that parties have the freedom not to accept an offer of non-contractual performance.

MUR had stated clearly that it was to be paid in USD, and it did not have to accept the offer of being paid in Euros, regardless of whether acceptance made ‘commercial sense’.

Lord Justice Arnold provided the following reasoning:

“I agree that RTI’s offer would have solved that problem with no detriment to MUR. The fact remains, however, that what was offered by RTI was non-contractual performance. In my judgment an “event or state of affairs” is not “overcome” within the meaning of clause 36.3(d) by an offer of non-contractual performance, and in particular an offer of non-contractual performance by the counterparty to the Party affected. Suppose the contract required carriage to port A which was strike-bound and the party invoking clause 36 was presented with an offer by the other party to divert the vessel to port B which would not in fact be detrimental to the party invoking the clause (say because the goods being carried were required at place C equidistant between port A and port B)? Is the party invoking the clause required to accept that offer? In my view the answer is no, because the party invoking the clause is entitled to insist on contractual performance by the other party. If the parties to the contract of affreightment intended clause 36.3(d) to extend to a requirement to accept non-contractual performance, clear express words were required and there are none.”

Comment

You could be forgiven for wondering about the wisdom of the Supreme Court decision; however, when placed against the fundamental importance in English law of the principles of both certainty of contract and paying strict attention to the wording of an agreement to establish the parties’ intentions, it becomes clear that no other conclusion could have been reached.

Certainty of contract is one of the reasons English law is often preferred by those undertaking cross-border projects and/or agreements. Although accepting the offer to be paid in Euro would have made commercial sense and even perhaps facilitated a ‘fairer’ outcome, the Supreme Court reenforced the need for parties to provide clear wording when it comes to force majeure clauses, especially in terms of if and when non-contractual performance could suffice in cases where supply chains or sanctions make contractual performance impossible.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 14 September 2024. This article does not constitute legal advice. For further information, please contact our London office.