Conversion from preference to ordinary shares was invalid
The Court of Appeal has confirmed that a conversion of preference shares into ordinary shares was invalid because it amounted to a variation of class rights that had not been properly approved.
DnaNudge Ltd v Ventura Capital GP Ltd [2023] EWCA Civ 1142 concerned a medical and health technology company that was partly financed by venture capital.
The company issued preferred shares to two investors, raising a total of £44m. The preferred shares carried the same rights as the existing ordinary shares in the company, except that the preferred shares carried a right to a cumulative preferred return on any dividend or capital distribution.
The company’s articles of association allowed an Investor Majority to convert the preferred shares into ordinary shares by sending written notice to the company.
The articles defined an “Investor Majority” as “the holders of a majority of the [preferred shares] and [ordinary shares] in aggregate as if such [shares] constituted one class of share”. The ordinary shares accounted for 86.7% of the company’s shares, meaning that the ordinary shareholders had the power to form an Investor Majority without the preferred shareholders.
Finally, the articles also stated that any variation or abrogation of the rights attaching to any class of shares required the consent in writing of the holders of more than 75% in nominal value of the issued shares of that class.
Ordinary shareholders served notice on the company purporting to convert the preferred shares into ordinary shares. The preferred shareholders objected, claiming that the conversion amounted to a variation of class rights and was invalid because no consent had been obtained under the articles.
The ordinary shareholders claimed that there had been no variation of class rights, because the articles stated that conversion was to be “automatic” on service of the relevant notice. This, they claimed, left no room for conversion to be conditional on obtaining class consent.
In the initial proceedings (Ventura Capital GP Ltd v DnaNudge Ltd [2023] EWHC 437 (Ch)), the High Court decided that the conversion did amount to a variation of the rights of the preferred shares.
It said there was an incompatibility between the conversion mechanism and the requirement for class consent. It resolved that ambiguity by making the conversion conditional on obtaining class consent. Because that consent had not been obtained, the variation was ineffective and void.
The company appealed. The Court of Appeal has now dismissed the appeal, essentially upholding the High Court’s reasoning.
The decision again shows the need for careful drafting when including conversion and class rights provisions in a company’s articles.
Access the original High Court decision in Ventura Capital GP Ltd v DnaNudge Ltd [2023]
Access the Court of Appeal’s decision in DnaNudge Ltd v VenturaCapital GP Ltd
EU’s Foreign Subsidies Regulation notification regime goes live
The notification obligations under the European Union’s new Foreign Subsidies Regulation (the FSR) have gone live.
Businesses will now have to notify qualifying transactions and public procurement procedures to the European Commission.
The FSR gives the European Commission a suite of new powers to tackle subsidies from non-EU countries. This will complement the EU’s existing state aid powers, which address governmental support by EU member states.
The FSR introduces a system of mandatory pre-closing notification and review for any merger, acquisition or new joint venture if:
- at least one of the merging parties, the target or joint venture is established in the EU and has an EU turnover of at least €500m; and
- the companies involved in the transaction received aggregate foreign financial contributions of more than €50m from non-EU countries in the three years prior to notification.
Read more about notifying under the FSR in this separate in-depth piece by our colleagues
Payment practices reporting requirements to be extended
The Government has announced that it intends to extend the current regime under which businesses report on their invoice payment practices.
Under the current regime, large UK companies and limited liability partnerships (LLPs) must publish a half-yearly report setting out their practice for paying supplier invoices, as well as statistics for their actual performance in paying invoices over the preceding year.
This includes the number of invoices paid within specified time periods.
The current regime is due to expire on 6 April 2024.
The Government has confirmed that it intends to extend the regime beyond its expiry date. It also intends to require businesses to report not only on the total number of invoices paid during the specific time period, but also on the total value of payments made during those periods. It will also introduce a requirement to report on the volume of disputed invoices.
The changes will be made alongside other measures, including broadening the powers of the Small Business Commissioner, which are designed to eliminate “barriers to growth” for small and medium-size enterprises (SMEs) caused by late payment of invoices.
Read the Government’s announcement on extending invoice payment practice reporting
EU consults on shortening securities settlement cycle
The European Securities and Markets Authority (ESMA) has issued a call for evidence on potentially shortening the settlement cycle for securities on the European Union’s capital markets.
A transaction in securities on a capital market involves two stages: the order, in which parties commit to the trade, and settlement, in which payment is made and the security formally transferred.
Settlement on most markets typically occurs on a T+2 basis. This means that settlement occurs two business days after the relevant order is made.
Under the EU Central Securities Depositaries Regulation (CSDR), all transactions in transferable securities on EU markets must be settled on a T+2 basis or shorter.
ESMA is asking for views on whether to amend the CSDR to mandate settlement on a T+1 basis (where settlement occurs the following business day) or a T+0 basis (where settlement occurs on the same day).
The call for evidence follows the decision by the US Securities and Exchange Commission in February 2023 to move settlement in securities on US capital markets to a T+1 basis. ESMA is also asking for views on the impact of the SEC’s decision on EU capital market participants.
The gap between order and settlement is used for various post-trade processes, including (where necessary) entering into FX transactions. As those transactions will have their own settlement cycles and may involve parties in multiple time zones, a key consideration for any move to T+1 or T+0 will be how to accommodate settlement of both FX and security trades in a coherent manner.
ESMA has asked for responses by 15 December 2023.
Read ESMA’s announcement on proposals to shorten the EU securities settlement cycle
Read ESMA’s call for evidence on shortening the EU securities settlement cycle
Read the SEC’s announcement on shortening the US securities settlement cycle
TPT publishes final private sector net zero transition plan disclosure framework
The Transition Plan Taskforce (TPT) has published its final disclosure framework for UK private sector entities transitioning to a low-carbon economy.
The TPT (a unit within HM Treasury) was launched in 2022 to develop a “gold standard” for UK climate transition plans. The final framework follows the TPT’s consultation last year on a draft framework.
