Marriott Harrison LLP acted for AIM-listed integrated VOIP provider Coms plc on its acquisition of Redstone Converged Solutions Limited (“Redstone”) from Redstone plc for a consideration of £9.5 million. Completion was conditional upon approval of the transaction by Redstone plc shareholders, which was obtained at a Redstone plc general meeting held at the end of 2013.
Dave Breith, CEO for Coms explains: “”We are delighted to complete the acquisition of Redstone’s ICT business and it demonstrates our intent to become a major player in the sector. Redstone is our seventh acquisition in 2013, and the business is now well positioned to provide the total end-to-end solution. Everyone benefits from this purchase; customers, our partners in the channel, our stakeholders and our staff. We will continue to build on the Redstone brand and this provides an immediate expansion and fully complements our growth strategy of Coms.”
By acquiring Redstone, Coms has instantly strengthened its portfolio with the provision of IT support, business infrastructure, data centre and smart building solutions to business across the UK and Europe.
Simon Charles (Corporate partner) led the Marriott Harrison LLP team with assistance from Ben Devons and David Strong (Corporate associates), Mark Lavers (Real Estate partner) and Bob Cordran (Employment partner).
Marriott Harrison LLP corporate partner Simon Charles said “The Marriott Harrison and Coms acquisition teams integrated really well on this. The transaction is a significant one for Coms and we look forward to continuing to work with Coms on the implementation of its acquisition strategy”.
The British Private Equity & Venture Capital Association (“BVCA”) has recently published for consultation amended drafts of its model subscription and shareholders’ agreement and articles of association for use in early stage investments, for the first time since 2010. Marriott Harrison’s corporate partner, Andrew Wigfall, was invited to join the working group responsible for the revisions in recognition of his wide experience in VC transactions.
The intention of the revised drafts is to bring these template documents up to speed with current market practice. Final versions are expected to be released in April.
The most noteworthy changes proposed include:
Subscription and shareholders’ agreement
- Expanding founder warranties concerning IT systems and software, compliance with anti-corruption laws, pension schemes, data protection and state funding, while scaling back the environment warranties
- Greater focus on IP protection relating to a founder’s works (clauses 15.4 and 15.5)
- The inclusion of vesting provisions for employee share options, something recognised as becoming a more common requirement (clause 8.2)
- Permitting founder shareholders to satisfy warranty claims brought against them by a transfer of shares (clause 7.10)
- New provisions detailing the consequences of an investor’s failure to comply with its subscription obligations on a staged investment (clause 5.5)
- Standard investor warranties and undertakings relating to possible implications under the United States Securities Act of 1933 and other US securities laws (generally required by US funds) (clause 38)
Articles of Association
- Authority for the company to purchase its own shares under new powers in section 692(1)(b) of the Companies Act 2006 (article 3.4). New provisions regulating holdings of treasury shares and their treatment under the transfer, allotment, anti-dilution and exit articles (articles 3.7. 10.4, 13.9, 15.13, 17.3(d) and 22)
- New rights for another fund in an investor’s group to take up the investor’s pre-emption rights (articles 13.8 and 16.9)
- New provisions adjusting the applicable conversion ratio for convertible shares in certain scenarios, such as a consolidation or sub-division of shares, or a capitalisation of profits (articles 9.8 – 9.10)
- Leaver provisions for the automatic conversion of founder or employee shares into deferred shares (articles 19.1 and 19.2)
We welcome the changes as a positive step in updating the documents to reflect current legal and market practice. These drafts will hopefully help to reduce time and costs for early stage companies in negotiating investments, while providing a realistic view of the rights and restrictions private equity investors will require and be willing to provide to owner managers.
In other news, The Guidelines Monitoring Group (“GMG”) has published an update to its guidelines on good practice reporting by private equity portfolio companies under the Walker Guidelines for Disclosure and Transparency in Private Equity (the “Walker Guidelines”), with updated examples provided. The purpose of the GMG is to assist private equity owned portfolio companies to improve transparency and disclosure in their financial and narrative reporting. The intention is to ensure that portfolio companies within its scope report to, or exceed, the standard required of FTSE 300 companies.
The GMG is currently reviewing whether the transaction size criteria should be lowered to bring more portfolio companies into its scope, which will be communicated this year. With the GMG not providing any indication as to how far it could widen its reach, PE managers of small to mid-cap firms will be looking over their shoulders to see whether their groups could fall under increased reporting standards.
With these developments and the market hopefully continuing to rise, not to mention the AIFM Directive coming into effect later this year, it promises to be another interesting year for the private equity industry.
The recent High Court decision in Abbar v SEDCO and others  EWHC 1414 (Ch) is an important reminder to investors of the potential difficulties involved in seeking the return of their investment where expectations of the investment vehicle are not attained.
The decision highlights that an award for damages for breach of contract will not be made where the contract can only be performed in a manner that offends the well established capital maintenance principle, whereby a limited company cannot return capital to its shareholders except in certain circumstances allowed under statute (namely, a reduction of capital, the redemption or purchase of shares, or a distribution in a winding up). This principle exists primarily for the benefit of the company’s creditors.
In May 2007 a Dr Abbar, subscribed £500,000 for shares in The Pinnacle Holdings Limited (“PHL”). A total of £120 million was subscribed by the promoters and by other investors. The capital was being raised to purchase a site in London, demolish existing buildings on the site and then sell the site for redevelopment within 12 to 18 months. The site was bought and prepared for sale but it was not sold. Instead, a decision was taken to retain it with a view to redevelopment. Attempts were made to raise new capital to buy out those investors who did not wish to retain their investment but these were only partially successful and a significant number of investors, including Dr Abbar, were unable to dispose of their shares.
Dr Abbar claimed that a contract existed by which he subscribed for his shares and that it was a term of the contract that the site would be sold within a period of not more than 18 months and that an exit from the investment would be available to the shareholders. The failure to sell the site within the agreed time was, therefore, a breach of a contractual term. As such, he argued that he should be able to recover damages from, among others, PHL. Dr Abbar also claimed in negligence and misrepresentation.
The High Court dismissed Dr Abbar’s claims, finding that there was no contract to the effect alleged and there was no misrepresentation.
The trial judge held, obiter, that an award of damages to a shareholder for breach by the company of a contract to return or to make a payment out of capital was not permissible where the contract could only be performed in a manner that offended the capital maintenance principle.
This case shows the importance the courts place on upholding the principle of capital maintenance for the protection of creditors. The share capital of a company is available to them should the company become insolvent and statute therefore limits the ways in which capital can be returned to shareholders in order to protect creditors. The High Court would only have awarded damages if PHL had made a sufficient profit in order to meet Dr Abbar’s claim.
Indeed, the obiter comments by the High Court are a stark reminder that damages may not be available to compensate a shareholder for loss in the event a company fails to comply with its obligations under such provisions.
A recent Court of Appeal decision has provided clarity on the modern law of penalties and guidance on the structuring of certain provisions in commercial agreements.
In Talal El Makdessi v Cavendish Square Holdings BV  EWCA Civ 1539, a seller (the “Seller”) sold a part of his shareholding in a company (the “Target”) to a purchaser (the “Buyer”). Under the terms of the share purchase agreement (the “SPA”) (i) the Seller retained 20% of the shares in the Target (the “Retained Shares”), (ii) the Buyer was to be (partly) paid in instalments (the “Deferred Consideration”), (iii) the Seller retained a right to sell the Retained Shares to the Buyer at a certain price (the “Put Option”), and (iv) there was a restrictive covenant prohibiting the Seller from competing with the Target following the sale of the part of Seller’s holding in Target (the “Restrictive Covenant”).
The SPA also provided that if the Seller breached the Restrictive Covenant, he would (i) forego the Deferred Consideration, (ii) forego the Put Option, and (iii) be required to sell the Retained Shares to the Buyer at net asset value (i.e. without accounting for Goodwill) (the “Clauses In Issue”).
The Seller breached the Restrictive Covenant and the Buyer sought a declaration that the Seller was not entitled to the Deferred Consideration and sought specific performance in respect of the sale of the Retained Shares at net asset value. The effect of the Clauses In Issue would be to deprive the Seller of $115 Million in consideration.
The Court of Appeal held the Clauses In Issue to be unenforceable on the ground that they were penalty clauses. A trifling breach had the same effect as a breach of very substantial gravity and did not fulfil a justifiable commercial or economic function.
The case provides clarity that a clause is not penal merely because it is not a genuine pre-estimate of loss and also that a clause must be “extravagant and unreasonable with a predominant purpose of deterring a breach of contract” (i.e. there is no “commercial justification” for it) to be deemed penal.
The case provides the following guidance relating to the structure of commercial agreements:
- A buyer may avoid the application of the Law of Penalties by structuring deferred consideration as conditional upon a specified future event i.e. the deferred consideration is not lost by a breach, but gained upon the happening of a specified future event.
- If a buyer does structure the loss of deferred consideration as a consequence of a breach, it must ensure that the payment is not “extravagant and unreasonable” in that there is no great disparity between the amount the seller is set to pay as a consequence of its breach and the loss to the buyer attributable to that breach and that there is a “commercial justification” for the existence of the payment which means its “predominant purpose is not to deter breach”.