Read December’s key insights from business law experts

Insights - 07/12/2016

Please see below our corporate insights for December from our business law experts.

Striking the balance between contractual certainty and flexibility

By Greg Vincent

Whilst certainty is an important feature of well-drafted legal documentation, flexibility is often required to provide commercial efficacy or to ensure that the document operates in a pragmatic way. A good example of this is when it is agreed that a party will use his endeavours to do something or when fairness or reasonableness is imported into what would, otherwise, be a strict obligation. However, with flexibility comes the risk of ambiguity and a possible dispute between the parties.

This is what happened in the recent high court case of Lehman Brothers International (Europe) (in admin.) v ExxonMobil Financial Services BV [2016] EWHC 2699 (Comm), where the Court was required to consider a typically innocuous term being used within a repurchase agreement. Namely, how should “close of business” be interpreted under the agreement.

The collapse in 2008 of Lehman Bros was an event of default under the agreement and entitled ExxonMobil to require that a portfolio of securities were immediately repurchased. In order to ascertain the value of the portfolio, ExxonMobil were entitled to serve a “default valuation notice” on Lehman Bros. The deadline prescribed under the agreement was “close of business on the fifth dealing day after the event of default occurred”. Timely service of the notice would give ExxonMobile greater control over the valuation of the portfolio. Conversely, late service would trigger a default valuation metric. The notice was received at 6.02pm on the deadline day.

Lehman Bros advanced arguments that close of business in London should be interpreted as 5pm. ExxonMobile presented expert evidence that, in the modern world, of commercial banks, close of business was 7pm.

The Court concluded that the use of “close of business” in the agreement rather than a specific cut off time was entirely deliberate in order to give the contract flexibility and to discourage arguments as to the exact time the notice was received (e.g. service being invalid if received 1 minute past a deadline).

Since the term “close of business” has no settled or commonly accepted meaning, the Court did not seek to define the term. Instead it sort to interpret the term within: (i) the wider context of the agreement; (ii) the commercial reality of the parties’ industries (oil and international investment); and (iii) what a reasonable person would expect. The Court accepted the evidence of ExxonMobile that close of business in this context meant 7pm.

Given that such a term can be open to a wide range of interpretations, if service of the notice is, in fact, time critical, it may be more sensible to avoid ambiguity and explicitly state a specific deadline. In this case, it would have avoided a dispute and the time and cost of going to court.

If you would like advice or assistance on any of the issues raised in this article please contact Greg Vincent (email: [email protected] or telephone: 0208 971 1033)

Fish, flesh, or fowl – or all three on the same plate?

By Catherine Fisher

A common theme running through our recent Corporate Insights seminars has been the risks involved in removing directors from office; avoiding unfair prejudice claims by minority shareholders and dealing with employee claims during and after an acquisition or restructure.

Last month, the High Court heard the first (reported) case of its kind, in which all three of these issues were combined.  The case was Wootliff v Rushton-Turner and others [2016] EWHC 2802(Ch) (3 November 2016) and the question was whether it was possible for the aggrieved director and shareholder to bring his claim for unfair dismissal as an unfair prejudice petition under s994 of the Companies Act 2006, rather than as an employment claim in the Employment Tribunal.

W was the sole shareholder and director of Smart Diner Group Ltd (SDL) which had created and run an online booking facility for restaurants. SDL merged with Harden’s Ltd and shares in the SDL and HL were subject to a Share Exchange Agreement dated 24 January 2013. After a consolidation of share capital new shares were issued and options for further shares approved. W entered into a service agreement with the merged entity, agreeing to act as its Chief Executive Officer.  W fell out with his new fellow directors and shareholders, and the falling out resulted in his suspension.

Initially, W issued a claim for (among other things) unfair dismissal in the Employment Tribunal, but he withdrew it, and subsequently issued an unfair prejudice petition, claiming that SDL had no grounds to dismiss him and that his removal was unfairly prejudicial conduct, as was the issue of further shares after his dismissal, which diluted his shareholding.

But can the court hear an unfair dismissal claim under s994, which offers a remedy to members when “the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of [the] member[s”? The Court decided that although this must always be a fact-sensitive question, in this case, the answer was that it could.

In the context of a quasi-partnership, such as in SDL, exclusion from management and breach of employment rights may be grounds for unfair prejudice.

This was the hearing of a preliminary application as to whether or not the claim could actually be brought in this way.  It will be interesting to see what the eventual outcome will be if this claim makes it to trial.

Should you have any questions or require help or assistance in relation to these issues please feel free to contact Catherine Fisher, Partner & Head of Dispute Resolution, by email [email protected] or telephone 01483 215357, or visit https://www.morrlaw.com/team/catherine-fisher/

Implications of large scale redundancies in a TUPE situation

By Emma McLoughlin

Winning an outsourcing contract is great news. However the downside is that you may be left with a significantly larger workforce than you need. The situation may be further complicated should you secure a contract that is currently serviced elsewhere.

It is very likely that, in this situation, the “TUPE rules” (Transfer of Undertakings (Protection of Employment) Regulations 2006 as amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014) will apply.

If these rules do apply, then any employee in the transferring business will transfer to you automatically from the current contractor, on their existing terms and conditions of employment.

So what happens if you have too many employees after the transfer?

One of our clients recently found themselves in this situation. They had won a large nationwide contract from an outgoing service provider and around 60 employees would be transferring to their employment. Of those employees, around half were based at the previous contractor’s head office in the north east and the others were in various other locations.  Our client knew that redundancies might be necessary. Many of the employees would not want to relocate across the country to its own offices. Some of those that did would be at risk of redundancy because of duplication of work with its existing workforce.

Our client had to consider its obligations under two sets of rules:

1. Under the usual TUPE rules, prior to the transfer our client was obliged to notify the existing contractor of any “measures”, including proposed manpower reductions that it envisaged would affect the transferring employees post transfer. The existing contractor was then obliged to inform the affected employees (or, where appropriate, their elected representatives) about the measures. This had to be handled very carefully. To ensure that the appropriate message was relayed (and the current provider complied with its legal obligations for which liability of up to 13 weeks pay for each affected employee could pass to our client) our client took as active a part as possible in discussions between the current provider and its employees.

2. In addition, our client was obliged to undertake collective redundancy consultation, because, post transfer, it proposed to dismiss around 25 employees at one establishment within a period of 90 days. Recent case law has held that an “establishment” is not necessarily the whole business but could be the local office or other employment unit to which the employees are assigned. This was particularly helpful to our client as it meant it only had to collectively consult representatives of those employees transferring to its head office (although this did not affect its obligations to carry out individual redundancy consultation with each affected employee, following the transfer).

The collective consultation process can be protracted. Our client was obliged to arrange for the election of representatives and then commence collective redundancy consultation at least 30 days before any dismissals could be effected. Failure to comply can lead to a “protective award” of up to 90 days’ gross actual pay for each affected employee, in addition to any liability under the TUPE rules. We advised our client that with the current contractor’s agreement, it could commence this collective redundancy consultation before the transfer and which resulted in considerable salary and time savings for our client.

Should you have any questions or require help or assistance in relation to this article please feel free to contact Emma McLoughlin, Associate Solicitor in the Employment Team (email: [email protected] or telephone: 020 8971 1088) or visit https://www.morrlaw.com/team/emma-mcloughlin/

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.