Whenever a company enters into any kind of transaction, consideration should be given to whether shareholder approval is required. One such kind of transaction is known as a “substantial property transaction”.
What is a substantial property transaction?
A substantial property transaction is where a company agrees to buy or sell a substantial non-cash asset, directly or indirectly, from a director of the company (or its holding company) or a person (or entity) connected with such a director.
A non-cash asset is any property or interest in property (other than cash) and it is considered to be substantial if its value exceeds (a) 10% of the company’s asset value and is more than £5,000 or (b) £100,000.
Any kind of arrangement falling into this category will require approval of the shareholders of the company (and possibly the holding company) pursuant to section 190 of the Companies Act 2006. This extra layer of approval is designed to protect shareholders from arrangements that might benefit directors to the detriment of the company and its shareholders.
A recent case relating to the Companies Act
In a recent case, MetalNRG plc v BritENERGY Holdings LLP and others [2022] EWHC 2528 (Ch), the High Court had to consider a number of items relating to section 190 of the Companies Act 2006 which remind us of some important points and give some insight into the court’s view of such scenarios.
The case involved, MetalNRGplc (MetalNRG), a natural resources investment company. Mr Rocco was appointed a director of MetalNRG in November 2019 to assist identify investment and business opportunities in the energy sector and, in March 2020, he identified a potential investment opportunity. It was decided that the investment would be funded partly by MetalNRG and partly by a limited liability partnership (the LLP). The LLP was owned by private investors which included Mr Rocco and a corporate entity which was wholly owned by Mr Rocco’s wife.
A joint venture company (the JVCo) was incorporated in order to make the acquisition and MetalNRG and the LLP entered into a shareholders’ agreement to govern their relationship, including the financing of the JVCo and the acquisition of shares in the JVCo by MetalNRG and the LLP on a 50/50 basis.
Due to a subsequent lack of funds, MetalNRG defaulted on certain of its payment obligations due to a lack of funds and therefore did not acquire 50% of the shares in the JVCo.
Negotiations therefore commenced and MetalNRG and the LLP reached an alternative arrangement to allow MetalNRG to acquire 50% of the shares in the JVCo whereby, amongst other things:
- a share purchase agreement was entered into pursuant to which MetalNRG would acquire certain of the LLP’s shares in the JVCo provided that a prospectus (pursuant to which MetalNRG was intending to raise equity finance, required to provide them with the necessary financing to acquire the shares) was approved by the Financial Conduct Authority; and
- the LLP granted an option to MetalNRG to acquire certain other shares in the JVCo, subject to certain conditions.
What lessons do we learn?
Whilst the case has not set legally binding law, the important and useful lessons learned from this latest case law on substantial property transactions include:
- A transaction or arrangement, completion of which is conditional on certain other matters taking place, does still require shareholder approval pursuant to section 190 of the Companies Act 2006. There is absolutely no need for there to be a high degree of certainty that the conditions will be met such that the acquisition will take place. This should not come as a surprise to practitioners as, otherwise, conditionality would allow parties to completely circumvent the requirements (and purpose) of section 190.
- The grant of an option to acquire shares in a company is a right to acquire shares and is treated as a right over or an ‘interest in’ property, being the shares themselves, and therefore amounts to a non-cash asset.
This is a useful clarification as, technically, the shares remain the property of the holder of the shares granting the option (keeping voting and dividend rights, for example) therefore it may be difficult for one to see how an option gives any right over or interest in shares.
- It may be that multiple agreements entered into between the parties need to be considered when determining if there is an arrangement which, collectively, falls into the substantial property transaction regime. In doing so, you may need to consider:
- the context in which the various documents are to be entered into;
- whether they are to be considered and approved by the board as part of one transaction (and whether perhaps the approval of one document is to be conditional on the other being entered into);
- are they to be signed and completed simultaneously;
- does the entire agreement clause refer to the two (or more) agreements constituting the whole agreement between the parties?
If the transactions or documents are considered to be linked, the value of the non-cash assets will need to be aggregated to treat the transaction as a single arrangement in order to determine if the transaction meets the ‘substantial’ threshold.
Consequences of not getting shareholder approval
The consequences of failing to obtain the necessary shareholder approval pursuant to the Companies Act 2006 can be significant with the company possibly being able to set the transaction aside, rendering it void.
In addition, a director or person connected with a director may be required to personally compensate the company.
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