Company law update

Are Labour's tax policies 'anti-business'? Debbie King considers this question and others as she rounds up the latest developments in company law

On 5 December 2013, the Chancellor, George Osborne, delivered his Autumn Statement to the House of Commons. In it, he unveiled a range of measures that aim to support small businesses. Some of the key announcements are set out below.

Autumn statement

A two per cent cap on the increase in business rates in 2014-15 was announced. Also, in a bid to help small businesses on the high street, Mr Osborne also announced a business rates discount of £1,000 for two years for small retail businesses.

In addition, a temporary reoccupation relief to apply for a period of 18 months was introduced for empty retail premises.

He also announced a further extension of the small business rate relief for another year until April 2015, which is expected to help approximately 540,000 businesses who pay the small business rates of tax and another 350,000 businesses pay nothing at all.

Mr Osbourne announced the abolishment of national insurance contributions from April 2015 for young persons under the age of 21 who are earning less than £813 per week. It is hoped that this will encourage business owners to employ these young people, by making it cheaper to employ them.

The fuel duty increase planned for September 2014 has been cancelled, enabling fuel duty to be frozen for the remainder of this parliament. The Chancellor claims that this will equate to a saving of approximately £1,300 for a small business with a van.

Overall, although the Autumn Statement introduced some measures which will be welcomed by many business owners, it is considered by many that more substantial measures were needed in order to make a more significant impact to the economy.

Anti-business

The Labour Party has announced that should they win the next election, they would propose to again raise the top rate of income tax on earnings above £150,000 from its current rate of 45p to 50p. This has fuelled Tory claims that Labour leader, Ed Miliband, and Shadow Chancellor, Ed Balls, could undermine the recovery by pursuing 'anti-business' policies.

But why are the plans being branded as 'anti-business'?

Critics have compared the plans to those recently implemented in France where the French President, Francois Hollande, increased the top rate of tax to 75 per cent, which prompted some wealthy individuals to seek business overseas.

Critics argue that if Labour's plans are introduced, it will stifle entrepreneurship and drive some of the most talented individuals overseas.

Surprisingly, the Institute for Fiscal Studies has said that the 50p rate would raise less than one per cent of what is needed to eliminate the deficit.

This seems to further highlight the concerns of many that the tax plans may be more detrimental to the economy than positive.

However, Shadow Chancellor, Ed Balls has defended his party against accusations that their plans are anti-business. He said: "This is not an anti-business agenda, but it's an anti-business as usual agenda."

He added that it was a "fair" measure to be used while Labour reduced the "huge" deficit it would inherit if it won the 2015 election.

Despite some criticism, Mr Balls would appear to have public opinion on his side. A recent poll suggests some 60 per cent supported the move, while just 17 per cent were opposed.

Proportionate clauses

The importance of drafting reasonable and proportionate clauses in an agreement was highlighted in the recent case of El Makdessi v Cavendish Square Holdings BV and another [2013] EWCA Civ 1539, in which the Court of Appeal considered whether clauses in a share purchase agreement were unenforceable penalties.

In February 2008, Mr Talal El Makdessi, a key figure in the Middle Eastern advertising and marketing world, sold part of his advertising group to Cavendish Square Holdings BV (C BV), retaining a 20 per cent shareholding.

The share purchase agreement ('the agreement') contained extensive restrictive covenants prohibiting Mr Makdessi from competing with the group following the sale.

The consideration for Mr Makdessi's shares was to be paid to him in various instalments linked to the group's operating profits, and the agreement also contained provisions catering for the subsequent purchase by C BV of Mr Makdessi's remaining shares.

The agreement provided that, if Mr Makdessi was in breach of his restrictive covenants, C BV would be:

(a) released from its obligation to pay the outstanding deferred consideration; and

(b) entitled to force Mr Makdessi to transfer the remainder of his shares in the company to C BV at a price based on net asset value (being a less advantageous price than Mr Makdessi would have otherwise been entitled to receive).

After the sale C BV claimed that Mr Makdessi had breached the restrictive covenants and sought to enforce the provisions set out at (a) and (b) above. Mr Makdessi argued that the clauses were unenforceable as the effect of the clauses was to deprive him of up to US$115m in circumstances where C BV had suffered no losses recoverable at law, therefore being disproportionate and unreasonable.

At first instance the courts ruled in C BV's favour. However, the Court of Appeal unanimously reversed that decision. The Court of Appeal held that the clauses were extravagant and unconscionable with a predominant function of deterrence rather than there being any commercial justification for the clauses.

For the clauses to be reasonable and proportionate, they would have needed to include a genuine pre-estimate of C BV's loss, rather than being penal.

The findings in this case not only serve as a reminder that a careful approach is needed when drafting clauses dealing with a seller's non-compliance with non-compete or similar covenants following completion of a transaction, but should also serve as a general reminder that the courts are looking for parties to adopt a reasonable and proportionate approach on restrictive covenants generally.

Blue moon

A consortium led by Manchester City Football Club have acquired Australian football club Melbourne Heart Football Club and will assume responsibility for all existing obligations of the club immediately.

The consortium also includes the ownership group of Australian rugby league club, Melbourne Storm.

This is Manchester City's second recent involvement with clubs based abroad, after its establishment of New York City Football Club in May 2013.

The Manchester City chief executive Ferran Soriano said he was excited about the acquisition. He said: "We are excited about the opportunity to make Melbourne Heart one of the most successful football clubs in Australia and throughout the region."

Heart could also be in for a name change, after an application to trademark the name Melbourne City Football Club was lodged by MHFC Holdings Pty Ltd on 16 January. It is still awaiting approval.

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