• At Kemp Little, we are known for our ability to serve the very particular needs of a large but diverse technology client base. Our hands-on industry know-how makes us a good fit with many of the world's biggest technology and digital media businesses, yet means we are equally relevant to companies with a technology bias, in sectors such as professional services, financial services, retail, travel and healthcare.
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GDPR: how to prepare for mandatory PIAs

Nicola Fulford, Partner and Head of Data Protection and Privacy,and Krysia Oastler, Data Protection and Privacy Associate provide practical advice on how to prepare for when PIAs become mandatory, once the General Data Protection Regulation comes into force. The original PDP Journals article can be read in full here.

Amending Articles of Association by Conduct: The Sherlock Holmes International Society Ltd v Aidiniantz

In The Sherlock Holmes International Society Ltd v Aidiniantz [2016] EWHC 1076 (Ch) the court was asked, amongst other things, to determine whether the company’s articles had been amended by an informal agreement inferred from the conduct of the members.  

The question arose in relation to whether the sole director of the company was in fact qualified to be a director as he was not a member of the company as was required by article 33 of the company’s articles of association, which stated that “only persons who are members of the Company shall in any circumstances be eligible to hold office as a Director”.

The only members of the company were, and had always been, Mr Aidiniantz and his mother, Grace. The directors on the date of incorporation of the company were Grace and Mr Aidiniantz’s half-sister, Ms Riley. Since incorporation, the directors had changed as follows:

  • 24 March 2005: Grace resigned her directorship and was replaced by Ms Decoteau.
  • 1 August 2008: Grace was re-appointed as a director and both Ms Decoteau and Ms Riley resigned.
  • 1 April 2011: Mr Riley was appointed and Grace resigned.
  • 22 August 2011: Mr Riley resigned and Grace was re-appointed.
  • 28 October 2012: Ms Decoteau was re-appointed.
  • 17 October 2013: Grace resigned.
  • May 2014: Mr Riley was re-appointed with Ms Decoteau resigning shortly thereafter.

At the time of the court hearing, Mr Riley was the sole director of the Company, but was not a member.

Relevant Law

Section 21 of the Companies Act 2006 states that a company’s articles of association can be amended by a special resolution of the shareholders.

But, where all shareholders who have the right to attend and vote at a general meeting of the company agree to a matter, such agreement shall have the same effect as if such matter had been decided at a general meeting of the company (Duomatic); this includes where the matter agreed to is an amendment to the company’s articles of association (Cane v Jones).

To give effect to the principal above, the agreement of the shareholders must be given in full knowledge of the matter, but such agreement can be express or implied and acquiescence can be equal to consent.  

Court’s Decision

The court considered whether any intentions on the part of Mr Aidiniantz and Grace could be objectively inferred in relation to the director appointments and, if so, what those intentions were.

The court dismissed the notion that Mr Aidiniantz intended to admit as members those appointed directors who were not already members as it had always been acknowledged by all parties to the proceedings that the only members of the company were Mr Aidiniantz and Grace.     

According to the court, the most credible explanation for Mr Aidiniantz and Grace’s conduct around the director appointments was that they intended to do whatever was required to allow the directors to be validly appointed. As it was necessary to amend the articles in order to appoint the directors, Mr Aidiniantz and Grace’s conduct demonstrates their intention, with appropriate or full knowledge of the matter, to amend the articles to allow each of the appointed directors to serve as directors without being members. Therefore, the articles were amended, through the conduct of the members, to allow Ms Decoteau, Ms Riley and Mr Riley to be qualified to serve as directors both at the time of their respective original appointments and for all times in the future.


The case serves as a comprehensive guide to the law surrounding how amendments can be made to articles of association other than by way of a special resolution of the shareholders.

It is also a message to smaller companies, whose affairs are often less formally documented, that changes, welcome or otherwise, to a company’s formal constitutional documents can occur through conduct and, accordingly, it is important, for the sake of certainty, to ensure that articles of association are followed or, if no longer workable, amended as necessary through a special resolution of the shareholders.  

I think Sherlock Holmes, himself, with his famous expression can best sum up the court’s position on amending articles of association through conduct: “when you have eliminated the impossible, whatever remains, however improbable, must be the truth”.

Financial promotions: an introduction

Most founders would agree that fundraising for a company in the early stages can be very challenging.  Quite often founders turn to friends, family and other third parties for equity finance.  If a person intends to invite or induce to engage in investment activity during the course of business, it is important to bear in mind the rules of UK’s financial promotions regulations.  The following note intends to provide only a brief introduction to the Financial Conduct Authority’s (FCA) financial promotion regime. 

Under section 21 of the Financial Services and Markets Act 2000 a (natural or legal) person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless the promotion has been made or approved by an authorised person or it is exempt.  It is a criminal offence for an unauthorised person to communicate a financial promotion in breach of the section 21 restriction.  The penalty could be either a fine or up to two years’ imprisonment, or both.  Further, any agreements entered into by a person as a customer as a result of an unlawful financial promotion are unenforceable against that customer.

The purpose of the section 21 restriction is to protect uninformed and unsophisticated investors from being misled into investing in a company which might lead to losing their entire investment.  Hence the restriction applies to formal communications such as business plans and prospectuses as well as to informal communications such as a conversation with a potential investor at a social event.

The three main elements that make a communication a financial promotion are:

  1. the communication is an invitation or an inducement to engage in investment activity;

Communications that are purely factual often do not amount to an invitation or inducement unless they have a promotional element.  Merely asking a person if they wish to enter into an agreement where there is no element of persuasion or incitement will not amount to an invitation.  An objective test is to be applied in establishing whether a communication is an invitation or an inducement.

  1. the communication is made in the course of the business;

The intention of this limb is to exclude genuine non-business communications such as communication between family members and friends.  An issue arises where capital is raised for small private companies.  The FCA’s view is that where such a company is already in operation, it will be acting ‘in the course of business’ when seeking to generate additional share or loan capital.  At the pre-formation stage, however, it will often be the case that individuals who are proposing to run the company will approach a small number of friends, relatives and acquaintances to see if they are willing to provide start-up capital.  In the FCA's view, such individuals will often not be acting ‘in the course of business’ during the pre-formation stage of a small private company.

  1. the communication does not fall within one of the exemptions set out in the Financial Promotion Order (“FPO”).

The FPO provides several exemptions from the section 21 restriction. 

The most useful exemptions to small private companies are:

Investment professionals

The section 21 restriction does not apply to communications which are made only to recipients whom the person making the communication believes on reasonable grounds to be ‘investment professionals’ or may reasonably be regarded as directed only at such recipients.  An "investment professional" includes:

  1. an FCA authorised firm such as a bank, broker or financial intermediary; or
  2. any other person whose ordinary activities involve them in carrying on the activity to which the communication relates for the purpose of business carried on by him or where it is reasonable to expect that individual to carry on such an activity for the purpose of business; or
  3. a government, local authority or an international organisation; or
  4. any person who is a director, officer or employee of any person listed in (i) to (iii) where the communication is made to that person in their capacity as such.

In order to rely on this exemption, it is necessary that the communication contains, or is accompanied by, a clear indication that the communication is directed only at investment professionals.  In addition, it is necessary to have in place proper systems and procedures to prevent recipients other than investment professionals (or investors permitted under one of the other exemptions) engaging in the investment activity to which the communication relates.

Self-certified sophisticated investors

The section 21 restriction does not apply where the communication is made to individuals whom the person making the communication believes on reasonable grounds to be a self-certified sophisticated investor. 

A “self-certified sophisticated investor” is an individual who has signed a statement in the form prescribed by the FCA certifying that one or more of the following statements applies to him:

  1. he is a member of a network or syndicate of business angels and has been so for at least the last six months prior to the date on which the certificate was signed; or
  2. he has made more than one investment in an unlisted company in the two years prior to that date; or
  3. he is working, or has worked in the two years prior to that date, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises; or
  4. he is currently, or has been in the two years prior to that date, a director of a company with an annual turnover of at least £1 million.

For the exemption to apply, the certificate must have been signed within 12 months of the date on which the communication is made.  Communication to a self-certified sophisticated investor must also be accompanied by a suitable warning that the communication has not been approved by an authorised person and that reliance on the communication for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the property or other assets invested. Such a warning must either be given to the recipient at the beginning of the communication or, if this is not possible in light of the means of communication used, the recipient must be given an oral warning at the beginning of the communication and must be informed that a legible copy will be sent to him within two business days.

High net worth investors

The section 21 restriction does not apply where the communication is made to individuals whom the person making the communication believes on reasonable grounds to be a high net worth investor.  A certified high net worth individual is an individual who has signed a statement in the prescribed form (please see attachment) certifying that one or more of the following statements applies to him:

  1. he had an annual income to the value of £100,000 or more during the preceding financial year; or
  2. he had net assets to the value of £250,000 or more, where net assets do not include property that is a primary residence or any loan secured on this residence, rights under an insurance contract, or benefits in the form of pensions or otherwise that are payable on the termination of service, death or retirement, to which he may be entitled.

The FPO also contains exemptions in relation to financial promotions made to overseas recipients and certain one-off communications.  One key point to note for persons who intend to rely on these exemptions is that before any communication is made, they should be clear about the scope and extent of such communication – the narrower the target the lesser the risk of making an unlawful financial promotion.  The FCA has also published guidelines on financial promotions using social media.  An analysis of these guidelines by our financial regulation team can be found here.

If a person intends to communicate information which would amount to a financial promotion and if none of the exemptions set out in the FPO apply, then such financial promotion should be communicated or approved by an authorised person.

Companies and Limited Liability Partnerships (Filing Requirements) Regulations 2016

On 30th June 2016 the Companies and Limited Liability Partnerships (Filing Requirements) Regulations (the “Regulations”) came into force. The Regulations bring into effect various changes to company filing requirements contained in the Small Business, Enterprise and Employment Act 2015.

The following key changes are worth noting:

  • New regulation 18A of the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 – LLPs are no longer required to keep their own register of members and register of members’ residential addresses, and instead can choose to file the information with the Registrar at Companies House. Note, LLPs are also able to keep their register of persons with significant control at Companies House, by virtue of section 790X of the Companies Act 2006 and The Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016.
  • New Part 8 of the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 – LLPs will no longer be required to file annual returns at Companies House, and may instead file a confirmation statement confirming that the information held in respect of the LLP is up to date. To be able to make the confirmation statement, the LLP will need to have notified Companies House of any changes to its registered office, members (including appointments, terminations and changes to details) and also any changes to the information that it has elected to keep on the public record (see above).
  • Amendments to section 1078A of the Companies Act 2006 – the new section will allow the Registrar to omit the date of birth of LLP members and persons having significant control of LLPs from the public registers maintained at Companies House.
  • New paragraph 13 of Schedule 1 to the Unregistered Companies Regulations 2009 – this amendment allows unregistered companies to deliver a confirmation statement instead of an annual return, bringing the position for unregistered companies into line with registered companies and LLPs.
  • Amendments to the classification system for company’s principal business activities – the Regulations also contain a classification schedule for types of company and adds additional codes for certain business activities.

The Confirmation Statement: the Annual Return rebranded

As part of its 'Red Tape Challenge', one of the Government’s proposals was to simplify companies' filing requirements, particularly in relation to annual returns, in order to reduce the administrative burden on smaller companies and company secretaries, and to streamline compliance. Prior to 30 June 2016, all companies were required to file an annual return with the Registrar of Companies on a yearly basis giving detailed information in relation to the company, including its shareholders, directors and share capital. In many cases this was simply a case of duplicating information that had been previously filed, either by past annual returns or in event-driven filings made to record changes made by the company during the year, such as share allotments.

Following the changes introduced by the Small Business, Enterprise and Employment Act 2015, as of 1 July 2016 the annual return (Companies House form AR01) has been replaced by the new confirmation statement (Companies House form CS01). The benefit of the confirmation statement is that it does not require previously delivered information to be repeated. This redundant procedure has been removed. Instead, companies must confirm whether or not the specified information held by Registrar is correct. Essentially it is a declaration made by the company that, "since the last confirmation statement, there have been no changes to the constitution of the company or that all changes have been reported at the time they took place.” Any changes that have occurred should be reflected in the confirmation statement being delivered. So rather than providing a snapshot of a company’s data at a specific date, companies are now required to “check and confirm” that the information held by Companies House is accurate.

Unlike the annual return, the confirmation statement is not required to be filed on a set date each year; it can be made at any time. A company can choose when to deliver the confirmation statement and can update the statement as often as it wishes. However, no more than 12 months must lapse between confirmation statements and once a confirmation statement has been made a new 12 month period starts to run. The date upon which a company completes the statement will be known as the 'confirmation date' and subsequent statements should then be filed at Companies House, within 14 days of the anniversary of the company’s previous confirmation date (rather than 28 days which was allowed for annual returns).

The confirmation statement will largely cover the same areas as the existing annual return. However, one of the major differences between the annual return and the confirmation statement is the requirement for a Register of People with Significant Control (“PSC”). The PSC regulations came into force in early April and require all UK companies to produce a PSC Register. For more information on the PSC register, see our previous commentary here.

The confirmation statement will simplify the annual return and considerably reduce the administrative burden.

For more information, contact our experts Rebecca Denton and Elena Kaltsas.

Privacy Shield update: international transfers of personal data

Over the last few months we have shared insights following the European Court of Justice (CJEU) ruling to invalidate Safe Harbor and replace it with the new Privacy Shield.

The Privacy Shield was formally adopted on 12 July 2016 and the European Commission’s adequacy decision entered into force immediately.  In the US, the Department of Commerce will start operating the Privacy Shield and companies will be able to certify from 1 August 2016.

This means that European companies will soon be able to rely on Privacy Shield to transfer personal data to participating Privacy Shield companies in the US.

The framework is intended to address the requirements of the CJEU’s ruling on the Safe Harbor framework and recommendations from the European Commission made in November 2013.  The new arrangement includes monitoring/reviews of participating US companies, sanctions for non-compliance, stricter rules for onward transfers of data, data retention restrictions, a number of dispute resolution mechanisms for individuals and a commitment from the White House to rule out mass surveillance on data transferred using Privacy Shield.  Despite the improvements to the arrangement, there are still concerns that it will be challenged and invalidated like the Safe Harbor regime.

Any challenge to Privacy Shield will take time and, in the meantime, Privacy Shield is a welcome addition to the mechanisms available for business to transfer data to the US.  There are other mechanisms for transferring data available such as standard contractual clauses and derogations which permit the transfer of personal data where the individual has consented or where it is necessary to conclude or perform a contract requested by the individual (although it is not best practice to rely on consent for bulk and continued transfers of data).  For mature organisations transferring personal data between group entities, binding corporate rules may be an attractive, more certain, option.

If you would like advice on the options available to your business or you have any questions, please contact Nicola Fulford or Krysia Oastler.


Outsourcing to the 'cloud' for financial services

The FCA has published its finalised guidance for firms considering outsourcing to the ‘cloud’ and other third party IT services. This follows feedback from stakeholders, including regulated firms and cloud service providers, that there is a lack of clarity about how the FCA applies its rules in connection with outsourcing to the cloud. This ambiguity in FCA rules to date has often been seen as a key barrier preventing regulated firms from using the cloud. The finalised guidance follows on from the guidance consultation (GC15/6) issued in November 2015. We have produced a paper on GC15/6 that can be found here. This paper seeks to outline the changes that the FCA has now decided to include in the final guidance having listened to the feedback submitted in relation to GC15/6.

Changes from GC15/6

The changes the FCA has made to its final guidance are summarised as follows:

Definitions of ‘the cloud’: The FCA maintains a definition of the ‘cloud’ as  a collective term that is much broader than just public cloud and encompasses a range of IT services provided in various formats over the internet including private or hybrid cloud, as well as Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS). The FCA resisted calls to clarify how the guidelines apply to the use of ‘public’, ‘private’ and ‘hybrid’ clouds specifically.

Critical, important or material outsourcings: A number of respondents sought clarity on what type of functions constitute critical, important or material outsourcing, asking for examples of relevant services, and examples of services that would be considered non-critical, important or material. The FCA stated that it would prefer that firms make an assessment of what services are critical, important or material in the context of their own outsourcing arrangements. The FCA did seek to provide further clarity by referencing MiFID Connect, which provides some non-exhaustive examples of the types of services that may be considered critical or important. A link to MiFID Connect can be found here.

Legal and regulatory considerations: The FCA rejected calls to amend the guidance in respect of operational risk and effective access to data and business premises for the firm, auditor and relevant regulator under contracts governed by UK law. However, it did modify the guidelines as they related to firms identifying all providers in a supply chain. The FCA acknowledges that the requirement to identify providers should only apply to services related to the regulated activity being carried out and will not necessarily include all providers in the supply chain.

Risk management: The FCA clarified that “concentration risk”, in its guidance, refers to its expectation that firms should monitor any reliance they themselves have on a single provider, consider the action they would take if this provider failed, and whether any concentration risk is within their risk tolerance.   

International standards: This section has remained the same with the FCA noting that there were some calls for further clarity but the FCA believes that it should be for firms to consider whether and how external assurance may be obtained when conducting their own due diligence.

Oversight of cloud provider: Despite some calls from respondents to remove the requirement for firms to retain sufficient skills and resources to test the outsourced activity, the FCA reiterated its view that it considers it is appropriate for firms to have the skills and resources to test outsourced activity and that it considers it an important part of a firms oversight of their provider to have sufficient in-house ability to supervise their outsourcing arrangements, and to take control of the relevant functions if things go wrong.

Data security: Following the feedback received from respondents the FCA has amended this section in to take into account the fact that some cloud providers cannot allow firms full control of the jurisdictions in which their data is held. Firms should now agree a data residency policy with the provider, which sets out the jurisdictions where their data can be stored, processed, and managed. Providers should have discretion to store, process and control data in the jurisdictions outlined in this policy which are considered acceptable by the firm.

Data protection: The FCA rejected calls to reference the upcoming EU General Data Protection Regulation in this section stating that it felt this section already signposts the relevant considerations that firms should comply with.

Effective access to data: This section elicited a number of responses from firms and providers in relation to the expectation that firms have “no restrictions” on the number of requests they can make of the provider to access or receive data. The FCA has not altered its guidance on this section, however, it has clarified that the concept of “effective access” is broad and wide-ranging, and it do not consider it appropriate to seek to narrow the scope of this requirement. It is the FCA’s belief that there should not be limits of the number of requests firms make, which could undermine the ability to have effective access. The FCA did clarify that there may be circumstances in which the data cannot be provided, but this is not inconsistent with the wording in the guidelines.

Access to business premises: As with the preceding section, this requirement drew a number of responses due to concerns around the expectation of a firm having physical access to a provider’s business premises. The FCA note that physical access to data centres may not always be necessary to provide effective access, but it also consider there may be circumstances where physical access to data centres is necessary for a firm to meet its regulatory requirements. Consequently it has amended the guidance to make it clear the relevant SYSC rules that firms need to take into account, and to clarify that ‘business premises’ is a broad term which may include head offices, operations centres, but does not necessarily include data centres.

Relationship between service providers: Over half of respondents commented on this section pointing out the burden of expecting firms to review all sub-contracting arrangements as well as the confidentiality issues that would exist between the provider and sub-contractor. As a result the FCA has modified its guidance to the extent that this requirement will only apply to those arrangements relevant to the provision of the regulated activity. 

Exit plan: The FCA has amended this section and now expect that exit plans are “fully tested”. This was as a result of concerns raised in relation to the expectation that exit plans be “regularly rehearsed” which was viewed by many as unduly onerous.

The future?

Whilst we have waited a long time for the FCA to give its views on cloud computing, we have already seen a growing number of companies in the financial services sector adopting cloud solutions. However, despite this guidance from the FCA a key stumbling block still looks likely to remain that there is a lack of certainty as to the appropriate standard in each outsourcing.

Whilst this guidance does clarify a number of issues stemming from the consolation in November 2015, it is still not specific and clear enough to allow firms to 100% confidently outsource critical and important functions to cloud solutions. However, the guidance is not binding and is intended to illustrate ways in which firms can comply with the relevant rules. The FCA expect firms to take note of the guidance and, where appropriate, use it to inform their systems and controls on outsourcing.

Find the full text of the final guidance here.

The Effect of Brexit on UK Digital M&A

With Britons having voted to leave the EU, the focus now turns to precisely how – and when – the UK will exit from the union.

In his resignation speech, David Cameron said he would leave that task to his successor; someone unlikely to be named until October.  This, coupled with the fact that the referendum was deliberately set up as non-binding, has led some Remain commentators to suggest that Article 50 notification may never be made, positing that a new Prime Minister may favour negotiation with Brussels and a possible settlement than out-and-out exit.   

Even if we accept Article 50 will be invoked, it sets a two-year deadline for Brexit that can be extended (although only with unanimous agreement from the EU’s other 27 members).  This means Britain could remain in the EU until Q3 2018 or longer; until such time, the UK is unlikely to make wholesale amendments to the law governing activity within the technology sector.  But what may change?     

Effect on legislation

The main piece of legislation governing corporate activity in the UK tech sector is the Companies Act 2006.  Although some parts of the Companies Act and the secondary legislation made under it have been derived from EU directives (such as regulation around a company’s accounts, the rights of its shareholders and the disclosure of information), we would not expect to see the Government looking to make wholesale changes to provisions governing the incorporation and operation of UK private companies.

There may, however, be potential tax implications.  In theory, Brexit restores the UK’s power to set its own taxes whilst stopping it from accessing the single market.  The UK could, then, have the ability to make sweeping changes to the way it taxes its citizens yet be subject to additional tax liability, such as duties on importing to the EU.  In practice, we believe little may change, particularly in respect of VAT and excise duties.  Currently, VAT forms a large proportion of the UK tax revenues and there does not seem to be significant benefit in moving away from the existing EU-derived system (other than potentially creating further classes of reduced rate or exempt goods).  Were the UK to join the European Free Trade Association, it will – like Norway – benefit from a suspension of customs and excise duties as well as VAT on goods that travel to an EU member state through the UK.

Even if certain UK taxation legislation was derived from an EU directive – such as the Parent-Subsidiary Directive and the Interest and Royalties Directive – it is likely to remain in place for the short-to-medium term.  Right now, the effect of these directives is that for a group of companies with a UK parent, interest, dividends and royalties from wholly-owned EU subsidiaries will usually receive those payments free from any withholding tax.  However, should the UK’s tax rules diverge from EU rules post-Brexit, this withholding tax exemption could be lost.       

Effect on existing transactional activity

The financial markets tend not to like uncertainty, and so it was unsurprising to see sterling hit a 30-year low the day after the referendum and the FTSE 100 taking an 8% hit (although it rallied to the same point it started the week by close of the markets in Friday, due no doubt to the Bank of England’s statement that it will take any measures – including a £250bn injection – to secure economic and financial stability). 

For UK businesses currently negotiating terms for a corporate transaction, or operating under the terms of previously-agreed metrics (such as would form part of an earn-out), term sheets and contracts should be re-examined.  Do forecasts still seem reasonable in the light of currency volatility or a potential short-term recession?  Do assets and liabilities need to be revalued?  Could Brexit trigger any material adverse change provisions?  In some cases, deals with pre-agreed valuations or financial payments may be subject to renegotiation following Thursday’s vote.   

Existing finance arrangements should also be reviewed to understand how any performance dip could affect financial covenants. 

Effect on the UK digital M&A market

The general view is that a healthy UK M&A sector is driven by market confidence.  Many commentators are predicting a slow-down – at least in the short to mid-term – especially where deals are reliant on the buyer raising funds. 

However, whilst the number of private tech M&A deals dropped slightly in the run-up to the referendum, non-EU investment into the UK has increased substantially this year compared to 2015.  The UK digital sector has historically been fairly resilient to market volatility and economic change, especially in the mid-market.  Whilst some large EU IPOs or trade sales (such as Telefonica) may be on hold until the dust settles, the UK digital market may be comparatively insulated. 

The UK digital sector is a market which constantly evolves and is constantly disruptive.  As many new players seek to challenge incumbent companies, there is a natural cycle of consolidation.  UK mid-market M&A is a legitimate business model, driven by more than just a desire for growth.  Strategic acquisitions can bring increased cost savings as well as an acquisition of talent, products and access to know-how and intellectual property.

That is not to say that UK digital companies won’t face challenges as a consequence of Brexit – we may see a rise in investment in the larger combined EU and European market at the expense of investment in the UK as well as reduced access to funding (with UK businesses no longer being able to leverage EU grants and subsidies).  Arrangements for migration, access to talent and the removal of certain passporting regimes cannot be overlooked.

However, many will see Brexit as an opportunity.  A fall in the value of sterling makes UK assets more attractive to dollar-rich investors and buyers.  The UK is a leading financial centre with a strong venture capital community, a vibrant entrepreneurial culture and an expertise in agile, fast-moving technology.  Corporate tax rates are favourable and the legal and regulatory environment continues to be robust.  These attributes are unlikely to change in light of the vote to leave the EU.

Court of Appeal affirms decision revoking Rovi's 'live pause and relocation' media patent

The Court of Appeal rejected Rovi's appeal against a finding that the patent in suit was invalid due to lack of inventive step over the prior art.

Legal context

Section 72(1)(a) of the Patents Act 1977 provides that a court may revoke a granted patent where the invention to which it relates is not a patentable invention. Section 3 of the Act provides that an invention involves an inventive step ‘if it would not be obvious to a person skilled in the art, having regard to any matter which forms part of the state of the art’.


This appeal was brought by Rovi against a judgment and consequential revocation order made by Mr John Baldwin QC on 14 July 2014 (Rovi Solutions Corporation & Another v Virgin Media Ltd & Others [2014] EWHC 2301 (Pat)) in respect of European Patent (UK) 1,327,209, which the judge ruled was invalid due to the lack of an inventive step.

Rovi had asserted the patent against the defendants, Virgin Media and TiVo. Virgin conceded infringement but alleged that the claims were invalid.

The patent covered an invention relating to both video on demand (‘VOD’) services (in which a user can request television media content for viewing at a time requested by him) and live TV services (the ordinary transmission of content over broadcast or cable TV services). The invention allowed a user to pause VOD or live TV content and resume watching it elsewhere (ie a different room or on different apparatus), functionality which the patent referred to as ‘relocation’.

The patent consisted of two broad categories of claim: claims relating to VOD relocation and claims relating to live TV relocation. The judge held that both sets of claims were obvious over a single piece of prior art: the Digital Audio-Visual Counsel 1.3.1 Specification Part 1, published in 1998 (‘DAVIC’).

Rovi appealed in respect of the live TV relocation claims only.


Rovi's primary argument on appeal was that the judge at first instance had erred in his application of the four-part structured approach to questions of obviousness, as formulated by the Court of Appeal in Pozzoli SpA v BDMO SA and Moulage Industriel de Perseigne SA [2007] EWCA Civ 55. This approach advocates the following steps:

  1. ‘(a) Identify the notional person skilled in the art; (b) Identify the relevant common general knowledge of that person;
  2. Identify the inventive concept of the claim in question or if that cannot readily be done, construe it;
  3. Identify what, if any, differences exist between the matter cited as forming part of the ‘state of the art’ and the inventive concept of the claim or the claim as construed;
  4. Viewed without any knowledge of the alleged invention as claimed, do those differences constitute steps which would have been obvious to the person skilled in the art or do they require any degree of invention?'

The fourth step highlights the importance of avoiding hindsight; the test is whether the invention was obvious to the notional person skilled in the artat the priority date of the patent, not subsequently, with the benefit of the alleged invention or any additional wisdom acquired later.

The judge at first instance had held that the live TV claims were obvious, given a discussion about delayed broadcasting in DAVIC. Delayed broadcasting is a service in which a user elects for a television programme to be recorded in advance at the ‘head end’ (ie on a remote server transmitting the programme rather than on a user device receiving the content).

The relevant claim (claim 22 as amended by Rovi in 2014) contained limitations which required a user to be able to ‘freeze delivery’ of a live TV programme delivered from a media server as part of an on-demand media service (by pressing pause). The freeze command (such as pressing pause) was transmitted from the user's first set-top box and on receipt, the server would begin recording the media. The user would then be able to resume watching from where he or she had left off on a second set-top box, which would receive from the server the recording, beginning at the point the user had pressed pause.

The key element in this, according to Rovi, was that, in the case of a live feed, recording only began once the user had pressed pause and this command had been received by the server. This was referred to in the case as ‘feature J’. The user could rewind the content up to the point that he/she had sent that command, but would not be able to rewind to before that point. It argued that in DAVIC, it was anticipated that recording would begin as soon as the user started watching the channel in question.

Rovi asserted that there were four steps an inventor would need to take in order to get from the invention disclosed in DAVIC to the patent; (1) deciding to add Personal Video Recording (PVR) functionality to their system, including ‘live pause’ (functionality by which a user can pause and resume live TV); (2) deciding to implement this at the head end (ie the remote server); (3) deciding to provide live pause by commencing recording when pause is pressed; (4) deciding to enable relocation and use live pause for the purpose of relocation.

Rovi accepted that (1) and (2) were obvious, but argued that step (3) was not, and in particular feature J. It argued that the judge had failed to take into account the motivation for taking steps (1) and (2), and that these steps ‘positively deterred’ a person from then taking step (3), because it would make far more sense to such a person to start recording from when the user began watching the channel in question, so that it could be rewound to the start if desired, rather than from when the pause button was pressed. This also allows for ‘instant replay’ and was the way preceding systems, such as those offered by TiVo had operated.

The Court of Appeal rejected these arguments. It found that although DAVIC did not expressly discuss recording from pressing pause, there was no inherent contradiction between the desire to implement PVR functionality, including live pause at the ‘head end’, and starting recording from the point that pause was pressed. The Court of Appeal found that there was evidence before the judge that live pause was a ‘hot topic’ at the time, and that much discussion centred on the idea of pausing live TV, rather than instant replay technology.

It had also been accepted by Rovi's expert that recording from the pause button being pressed required less resources than recording from when a viewer began watching a programme or a channel. The Court of Appeal noted that, in implementing the invention, the person skilled in the art would take a minimal and resource-light approach, especially as instant replay was less of a desirable feature at the time. The Court of Appeal therefore found that the judge was entitled to find that the implementation of a system with feature J was obvious over DAVIC, and therefore the live TV claims as a whole were invalid.

Practical significance

This case reiterates that the Court of Appeal will be reluctant to review a judge's findings as long as it is satisfied that the correct approach has been applied and there has been no error of fact or principle.

Rovi also criticized the alleged brevity of the first instance judgment. However, the Court of Appeal rejected this, noting that although a judge must set out his or her conclusions and brief reasons behind those conclusions, he or she is not required to deal with every argument and evidential dispute that is debated in the course of a trial.

This article was originally published in the Oxford Journal of IP Law and Practice. For further information, please contact Peter Dalton. 

Rule relaxation for unlicensed lotteries

This piece looks at a recent relaxation in some of the rules around unlicensed lotteries[1]

In April 2016, some of the rules on running raffles were relaxed, with the intention of making it easier to raise funds for good causes.  Before this relaxation, unlicensed raffles were estimated to generate funding of about £150m a year, and the changes are expected to be of greatest benefit to small organisations who are more likely to rely on raffles as a significant source of income.[2]

It is a criminal offence to run an unlicensed raffle in Great Britain unless an exemption applies.  In the past, fund-raising raffles could only be held in conjunction with another event which was not (and was not intended to be) profitable, and workplace raffles could not be used to raise funds because all the proceeds had to be used to pay expenses or prizes. 

However, from 6 April 2016, raffles can also be held to raise funds in conjunction with commercial events where some of the proceeds (eg from entrance fees, sponsorship, sales of refreshments etc) do not go to charity (“incidental raffles”), and workplace raffles are now permitted to make a profit provided that the profit goes to charity.

Raffles are intended to remain small-scale and to be run only for the benefit of good causes or entertainment, and so other restrictions continue to apply.  All the proceeds of ticket sales must go to the specified charity, other than money used to pay expenses (up to £100 for incidental lotteries, and “reasonable costs” for a workplace lottery) or prizes (up to £500 for incidental lotteries – but there is no limit on the value of prizes which can be donated).  Raffle tickets for incidental lotteries can only be sold on the premises where the related event takes place, and only during that event; workplace raffles can only be advertised within the workplace, and the organisers and all the participants must work at the same premises.

Other restrictions have however been relaxed.  It is no longer necessary to announce the winner of an incidental raffle before the end of the event – so raffles can be based on events such as balloon races where the result will not be known until later.  The Gambling Commission recommends that the organisers make it clear to participants when the result will be declared, but this is likely to be sensible commercial practice in any event.  Documentary tickets are still required for workplace lotteries, but it is no longer necessary for the tickets to name the organisers and those entitled to participate, or to show the ticket price.  This should marginally reduce the cost of running a workplace raffle, as organisers can use the traditional books of “cloakroom tickets” rather than incurring the expense of personalised tickets.

Further information about running a raffle, or a promotional competition, is available in our guide here.


[1] Under the Legislative Reform (Exempt Lotteries) Order 2016, which came into force on 6 April 2016.

[2] See Government Impact Assessment 22 April 2014.

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