Major company law overhaul

Major changes to simplify and improve company law were published in the Company Law Reform Bill. The bill contains proposals which the government claims will save businesses up to £250 million a year.

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In an attempt to support small businesses, the company law will be substantially re-written to make it easier to understand and ensure that Britain remains one of the best places in the world to set up and run a business.

The changes are designed to - at least in theory - help keep the regulatory burden on business to a minimum, promote shareholder engagement and encourage a long-term investment culture.

It is estimated that small businesses will save up to £100m annually due to:

• restructuring those parts of company law most relevant to small businesses so that they are user-friendly and easier to understand;
• simpler rules for forming new companies;
• abolition of the need for a company secretary;
• making annual general meetings optional.

There will be benefits from a range of measures for all businesses including:

• greater clarity on directors' duties, including making clear that they have to act not only in the interests of shareholders, but also pay attention to the longer term interests of employees, suppliers, consumers and the environment;
• allow greater use of e-communications and removing the need for hard copy share certificates;
• an option for all directors to file a service address on the public record rather than a private address.

Shareholder engagement and activity will also be promoted through enhancing the powers of proxies, making it easier for indirect investors to be informed and exercise governance rights in the company.

The comprehensive package also includes proposals to introduce auditor liability and boost audit quality including:

• allowing shareholders to agree to limit the auditors' liability to the company, so the financial liability of the auditor relates to the auditors' responsibility for the loss;
• greater rights for shareholders to question auditors and named partners for audit reports;
• audit reports to give the name of the individual lead auditor, as well as the audit firm (although provision will be made for confidentiality in exceptional cases).

Auditors on the rack

The bill also includes a new offence for recklessly or knowingly including misleading, false or deceptive information in an audit report. The bill will also be used to implement the EU Takeover Directive, placing the work of the takeover panel on a statutory footing. It will implement the company law aspects of the European Transparency Directive (relating to disclosure of shareholdings).

Making institutional investors accountable

A power is provided to require institutional investors to disclose how they have used their votes, thus encouraging further shareholder activity. The bill includes a power to allow faster updating and amendment of company law in future, subject to rigorous consultation and parliamentary scrutiny requirements.

Trade and industry secretary Alan Johnson said, “An effective framework of company law and corporate governance will promote enterprise and help stimulate investment in the UK. We have focused throughout on making the law more accessible and 'thinking small first'.”

“These measures also represent a significant step forward in ensuring that our company law remains up to date, flexible, and accessible for everyone who uses it.”

“We have consulted every step of the way. Our company law is central to corporate activity and this important updating will provide a tremendous boost for British businesses, large and small. We are determined to make sure that our law keeps step with economic needs. This bill will help ensure that Britain remains a prime place for incorporation.”

The bill was announced in the Queen's Speech on 17 May 2005. The Company Law Reform White Paper was published on March 17 2005. Details of the consultation and further background information can be found at the DTI website's company law investigation page.

Copies of responses to the white paper are available on the DTI website. For a brief overview, see TheChilli perspective below.

TheChilli perspective:
The industry and entrepreneurs have been waiting a very long time for a thorough overhaul of the company law so that it meets the needs of small business. Although the proposals are to be very much welcomed, it will be not help the confusion and frustration felt under the current regulations, as it will be not be until 2007 before the new changes will be implemented in law.

Current company law was designed around large companies in mind, with its ensuing complexity and intricacies. The provisions that apply to small private companies are often expressed as an exception to the provisions applying to large public companies, making them hard to find or understand.

Those parts of the law that are most relevant to small companies (such as the sample model of articles of association and the requirements on accounts and reports) come first in the new bill, so that the provisions that apply to small businesses will be easier to find and hopefully understand.

Small companies will also find it easier to identify the basic day-to-day requirements that apply to them.

During 2007, Companies House will be offering a web-based incorporation facility and easier access to relevant material; for example, its own details through the “my Companies House” portal.

The main changes to company law affecting small companies are as follows:

Forming a company
There will be separate model articles of association for private, small companies. These will contain the minimum key rules on the internal workings of the company and will be shorter and clearer.

No requirement for a company secretary
The proposal will abolish the requirement for private companies to have a company secretary.

Directors
The general duties that a director owes to the company are currently established in case law rather than statute making it hard for them to be widely understood. The bill includes a statutory statement of directors’ general duties both to make the law in this area more accessible and to change the law where it no longer corresponds to modern business practice. The DTI will attempt to provide clear guidance for new directors on what these duties mean.

Directors’ addresses on the public record
Directors will automatically have the option of filing a service address on the public record (rather than their private home address).

Resolutions and meetings
Private companies will not need to hold an annual general meeting unless they positively opt to do so. It will be easier for companies to take decisions by written resolution rather than holding a meeting, as such resolutions may in future be carried with a simple or 75 percent majority of eligible votes rather than requiring unanimity. Companies will be able to make greater use of electronic communications with shareholders.

Accounts and Reports
Small and medium sized companies will still be able to file abbreviated accounts with Companies House. The deadline for private companies to file their annual reporting documents will reduce from ten months after the year-end to nine, reflecting both improvements in technology and the increased rate at which information becomes out of date.

Financial assistance and capital maintenance
The rules on providing financial assistance to potential or actual shareholders, which limit the circumstances in which companies can provide assistance for the acquisition or purchase of their own shares are highly complex and largely irrelevant to the majority of private companies. The proposals will abolish them. This would make it easier for private companies to make capital reductions.

Keeping the law up to date
In order to keep the law up to date and ensure it meets users’ needs, the bill includes a power to allow the reform or re-statement of company law to be made in future by a special form of secondary legislation, subject to strong requirements on public consultation and parliamentary scrutiny.

More information
The Company Law Reform Bill will take several months to complete its passage through Parliament and is not expected to come into force before 2007. The full text of the bill with explanatory notes is also available through the DTI website and through the Companies House website. You can also follow the progress of the Bill directly on the United Kingdom Parliament web page.

© Chilli Publishing Ltd 2005

11NOV2005