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CMA Issues Greenwashing Guidance to Fashion Industry: What Brands Need to Know
On 18 September 2023, the UK Competition and Markets Authority (CMA) issued important guidance to the fashion industry regarding “greenwashing.”
This follows concerns that companies may be making misleading environmental claims, which can deceive consumers and harm competitors that adhere to stricter sustainability standards.
Greenwashing refers to unsubstantiated or exaggerated claims about a product’s environmental benefits. The CMA’s new guidance outlines how businesses in the fashion sector should ensure that their eco-friendly claims are accurate, transparent, and comply with consumer protection laws.
Key Points From The CMA Guidance:
- Substantiated Claims: Any claims about sustainability must be backed by credible evidence. For instance, if a brand claims its clothing is made from “recycled materials,” it should clearly specify the percentage of recycled content and provide proof. Each business in a supply chain has a responsibility to ensure that its claims are accurate and substantiated.
- Avoid Vague Language: Phrases such as “environmentally friendly” or “sustainable” should be used cautiously. The CMA advises that environmental claims must be clear and accurate whether they are made on a product, in advertising materials, in store or online.
- Lifecycle Impact: Environmental claims should consider the entire lifecycle of a product, from production to disposal. If a company makes a claim based on a specific part of a product’s life cycle, then it should provide a clear and prominent summary of the aspect of the life cycle to which the claim relates, as well as access to further information.
- Comparative Claims: If a company makes comparisons with competitors regarding sustainability, those comparisons must be fair and verifiable. For instance, stating that a product is “greener than the market average” must be supported by clear data and benchmarks. Consumers should be able to make informed choices about competing products and businesses, or between different versions of the same product.
- Full Transparency: Brands should provide full information about the environmental impact of their products, including any limitations in their sustainability claims. Transparency helps consumers make informed choices and fosters trust in the brand.
Implications for the Fashion Industry
The CMA’s guidance signals an increased focus on consumer rights in relation to environmental claims. Businesses found in breach of these principles may face enforcement actions, including fines or legal action under the UK’s consumer protection laws.
Fashion brands should review their current marketing practices and ensure that all environmental claims are truthful, specific, and supported by evidence. It is vital to communicate any green credentials clearly and to avoid misleading consumers, as regulators and consumers alike are placing greater scrutiny on sustainability efforts.
To discuss any of the points raised in this article, please contact Ann-Maree Blake or fill in the form below.
Five Key Legal Concerns When Buying a Business in Administration
Purchasing a business in administration can be a great strategic move. However, this process comes with its own set of risks. Below we explore the five key legal concerns that buyers should consider when purchasing a business in administration.
1. Establishing What Is For Sale
The information in sales particulars will not be guaranteed, so a physical inspection of the assets is recommended. Some assets might be subject to retention of title or lease agreements and so will not be the seller’s to sell.
Debts owed to the seller generally remain with the seller and are collected by the administrators. The buyer may want to consider making an offer on the debts or negotiating an arrangement whereby the buyer collects the debts on behalf of the administrators for a fee.
2. Legal Due Diligence
Undertaking comprehensive legal due diligence is crucial when considering the acquisition of a business in administration. This involves a review of (amongst other things) the target company’s commercial agreements, any ongoing legal disputes, intellectual property rights and regulatory compliance. However, there may be little time available for the buyer to carry out thorough due diligence due to completion deadlines and in any event, generally, there will be no right of recourse if information provided by the administrators is incorrect. It is therefore important to strike the right balance of legal due diligence when buying a business in administration.
3. Warranties, Representations And Indemnities
Administrators act as agents of the seller. They will accept no personal liability under the sale agreement and will give no warranties about the assets sold. As a result, the normal warranties that a seller might give will be very limited or excluded entirely. Buyers should approach the purchase with the understanding that they are likely to receive the business on an “as-is” basis, with no assurances about the condition or performance of the business or its assets.
Conversely, the administrator will likely require the buyer to provide indemnities to the administrator and seller in respect of any liabilities that arise post-completion such as any employment related claims under The UK Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) or any ongoing contractual obligations that the buyer agreed to take over.
4. Employment Law
Navigating employment related legal issues is crucial when acquiring a business in administration. Where possible, buyers should examine existing employment contracts and any pending employee disputes. TUPE generally applies where the seller company is in administration. As a result, employees assigned to the business that is being sold will be transferred automatically on their existing employment terms to the buyer. It is therefore not possible to elect to choose certain employees and employment related liabilities in the same way as other assets and liabilities.
TUPE is particularly important in an administration sale context as TUPE related claims are likely to be focussed on the buyer given the seller’s insolvency and, as mentioned above, administrators will usually require broad indemnities from buyers for any liability as a result of failing to comply with TUPE.
5. Customer and Supplier Relationships
Maintaining strong relationships with customers and suppliers is essential for the continued success of any business. Buyers should assess the impact of the acquisition on existing customer and supplier relationships. Reviewing and understanding the contractual obligations of the target business is crucial. Existing contracts with customers, suppliers, and other stakeholders should be reviewed to assess transferability of contracts, identifying any change of control provisions, and understanding the consequences of the acquisition on ongoing agreements. Your legal advisor can provide guidance on contract novation, renegotiation, or termination to ensure a seamless transition and avoid legal disputes.
Conclusion
While buying a business in administration presents unique opportunities, there are inherent risks that require careful consideration. At Quastels, we have experienced legal advisors in our Corporate Department to draft and review business sale agreements and all related documents to ensure that the buyer’s interests are protected to the fullest extent within the constraints of the administration sale.
To discuss any of the points raised in this article, please contact Nilam Davé or fill in the form below.
Structuring Investments: Possible Approaches for Entrepreneurs and Investors
In our previous article, we explored just some of the different types of investments available to entrepreneurs and investors, ranging from bootstrapping and seed rounds to venture capital and private equity.
This time, we aim to delve into the potential structuring of these investments (excluding debt), focusing on the variety of mechanisms typically adopted such as preference shares, convertible shares and redeemable shares. We also touch briefly on tax-efficient schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
We talk through some of the advantages and disadvantages of these structures from the perspectives of both companies and investors interchangeably. Needless to say, what might be a disadvantage to an investor will no doubt be an advantage to the company and vice versa.
As with the points addressed in the last article, many of the following models overlap and are often used together. For example, companies and investors often adopt a combination of preference, convertible and redeemable shares and sometimes use all three at once!
Preference Shares: Prioritising Investor Returns
Preference shares are a popular investment vehicle, offering investors certain privileges over ordinary shareholders. These shares typically guarantee a fixed dividend, which must be paid out before any dividends can be issued to ordinary shareholders. In the event of a liquidation, preference shareholders also have a higher claim on assets than ordinary shareholders.
Key Features:
- Fixed Dividends: A set return that provides a steady income stream.
- Liquidation Preference: Priority over ordinary shareholders during asset distribution.
- Non-Voting Rights: Typically, preference shares do not grant voting rights, allowing founders to retain control.
Advantages:
- Guaranteed returns for investors via fixed dividends and a higher claim on assets during liquidation.
- From the company’s perspective, founder control is maintained due to typical non-voting status of the preference shares.
Disadvantages:
- The investors’ returns are typically limited to fixed dividends with no additional upside.
- Fixed dividends can cause a cash flow issue for the company.
Redeemable Shares: Defined Exit Strategy
Redeemable shares give the company the option to buy back the shares at a future date. This can be attractive to investors looking for a clear exit strategy.
Key Features:
- Exit Strategy: Provides a clear mechanism for returning capital to investors.
- Fixed Terms: Typically, terms are agreed upon issuance regarding timing and price.
Advantages:
- They provide a clear exit strategy for investors where the redemption is mandatory.
- The company can retain some level of flexibility with an optional redemption.
Disadvantages:
- Mandatory redemptions can cause problems for the company where there are not sufficient funds
- Investors may feel constrained by the redemption terms as they cannot choose when to sell their shares independently; they must wait for the company to initiate the buy-back.
Convertible Shares: Flexibility and Potential Upside
Convertible shares can typically be converted into ordinary shares from either preference or redeemable shares at a predetermined ratio, offering investors the upside potential if the company performs well.
Key Features:
- Conversion Option: Converts into equity, often at a discount, allowing investors to benefit from future growth.
- Conversion Trigger: Can be time-based or event-based (e.g., hitting certain milestones).
Advantages:
- Potential for significant and uncapped returns for the investor if the company grows.
- Company can benefit from a cash flow perspective if shares are converted from preference to ordinary.
Disadvantages:
- Existing shareholders may face dilution.
- Conversion values typically depend on future company valuations leading to uncertainty for the investor.
- Non-voting shares can become voting ordinary shares impacting on founder control.
EIS and SEIS: Tax-Efficient Investments
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are UK government initiatives designed to encourage investment in early-stage companies by offering tax relief to investors. Specialist tax advice should be taken. These schemes can be particularly beneficial for startups looking to attract investors by reducing their risk.
Advantages:
- The potentially significant tax reliefs can enhance investment attractiveness.
- Deferral or exemption of capital gains tax improves investor returns.
- Loss relief reduces risk for investors.
Disadvantages:
- Must Be Ordinary Shares: Limits the flexibility in structuring the investment from both parties’ perspective.
- In particular, the fact that ordinary shares must be used means that there is a pro-rata equality of voting/dividend rights. This can lead to a reduction in founder control and, from the investors perspective, no guaranteed return on investment.
- Eligibility requirements can limit applicable companies.
Conclusion
Structuring investments effectively is crucial for fostering strong relationships between entrepreneurs and investors, ensuring both parties can achieve their financial objectives. By understanding the nuances of various investment structures, from preference shares to tax-efficient schemes like EIS and SEIS, businesses can attract the right kind of capital to fuel their growth.
Whether you’re a startup seeking seed funding or an investor looking for lucrative opportunities, we can offer comprehensive legal guidance to help structure investments that align with your business goals.
To discuss any of the points raised in this article, please contact Adam Convisser or fill in the form below.