COMPANY LAW REFORM
March 2005
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Company Law Reform
Presented to Parliament by the
Secretary of State for Trade and Industry
by Command of Her Majesty
March 2005
Cm 6456 £ 36.25
The Department of Trade and Industry invites comments, by 10 June 2005, on
the issues set out in this consultative document.
You are invited to send comments, together with any supporting evidence on
any part of this consultation, preferably by email to:
companylawreform@ dti. gsi. gov. uk
or by letter to:
Patrick Barry
Corporate Law and Governance Directorate
Department of Trade and Industry
5th Floor
1 Victoria Street
London
SE1H 0ET
Telephone: 020 7215 6576
The document may be viewed from the Department’s website at
www. dti. gov. uk/ cld/ review. htm
Further printed copies of the document can be obtained from The Stationery
Office: telephone 0870 600 5522 or email book. orders@ tso. co. uk
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Contents
PAGE
Foreword by the Secretary of State 3
1 Summary 5
2 Setting the Scene 8
3 Enhancing Shareholder Engagement and a Long- Term Investment Culture 16
3.1 Improving shareholder dialogue 16
3.2 Enfranchising indirect investors 18
3.3 Directors 20
3.4 Minority shareholder rights 24
3.5 Auditor liability and audit quality 25
3.6 Company takeovers 28
4 Ensuring Better Regulation and a “ Think Small First” Approach 29
4.1 Improving accessibility 29
4.2 Resolutions and meetings 30
4.3 Company constitutions 33
4.4 Dematerialising share certificates 36
4.5 Company secretaries 37
4.6 Offences 37
4.7 Register of members 39
4.8 Capital maintenance and share provisions 40
4.9 Companies House 44
4.10 Reports and accounts 45
4.11 Public/ private split 47
4.12 Jurisdictional migration 48
4.13 Overseas companies 49
4.14 Arrangements and reconstructions 50
4.15 Authorisation of political donations 50
4.16 Company charges 51
4.17 Transparency Directive 52
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Company Law Reform
5 Making it Easier to Set Up and Run a Company 56
5.1 Company formation 56
5.2 Company names and trading disclosures 57
5.3 Directors’ home addresses 58
6 Providing Flexibility for the Future 59
6.1 Powers 59
6.2 Institutional arrangements 60
6.3 Company investigations 61
6.4 Miscellaneous repeals 61
7 Draft Clauses 62
A Formation 63
B Directors 85
C Company Secretaries 127
D Resolutions and meetings 135
E Rights of members 163
F Communications 167
G Accounts and reports ( small companies) 187
H Share capital 205
I Register of members 233
J Offences 237
K Reform power 245
8 Draft Model Articles for Private Companies 254
Annexes
A Regulatory Impact Assessment 265
B Guidance notes on new model articles 282
C Miscellaneous repeals 287
D Offences – proposed changes of detail 289
E Details of useful background information 290
F The Consultation Code of Practice Criteria 291
2
Foreword
A fair, modern, and effective framework of company law is crucial to our
performance as an economy, and as a society. Britain was among the first
nations to establish rules for the operation of companies, and our law remains
a model for many nations overseas.
But over time the law can become outdated, and risks presenting obstacles to
the ways companies want and need to do business in today’s world. We are
determined to avoid this. That is why we established the Company Law
Review, to consider in detail how our law can best be modernised.
The Review has been universally recognised as providing a thorough and
authoritative assessment of the sorts of changes which need to be made, and
it provides the essential blueprint for the reforms we now propose. I am
enormously grateful to all those who have participated in its work. We have
continued to explore every opportunity for reform which will bring the law
more into line with today’s business needs, and remove unnecessary burdens,
particularly from the smaller firms which are so critical to our economic health.
This White Paper sets out a range of measures for the proposed Company Law
Reform Bill. They have been designed to further four crucial objectives:
• to enhance shareholder engagement and a long term investment culture;
• to ensure better regulation and a “ Think Small First” approach;
• to make it easier to set up and run a company; and
• to provide flexibility for the future.
Taken together, I believe these measures represent a huge step forward in
ensuring that our law remains up to date, flexible, and accessible for all those
who use it. They are essential if we are to maintain our internationally
competitive position, and I look forward to your comments.
The Rt Hon Patricia Hewitt MP
Secretary of State for Trade and Industry,
Minister for Women and e- Minister in Cabinet
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Company Law Reform
4
1 Summary
This White Paper builds closely on the work of the Company Law Review
( CLR), and of the Government’s subsequent White Paper of 2002. The CLR itself
conducted a series of public consultations before publishing its final report,
and the Government has taken full account of that process, of responses to the
White Paper, and of subsequent consultations, both formal and informal, in
determining the policy measures now set out in this document. Draft clauses
are included for a number of the areas.
Company law can be very complex, and there will be some interested parties
( perhaps particularly smaller firms and their advisors) who will want to gain
some understanding of the central measures proposed, but who may not wish
to investigate the technical minutiae of how they will be delivered in
legislation. Set out below, therefore, is a list of the key legislative changes.
A separate small business summary has also been prepared, highlighting the
measures likely to be of most interest to smaller firms and their advisors.
Summary of Legislative Changes
Enhancing shareholder engagement and a long- term investment culture
Shareholders are the lifeblood of a company, whatever its size. We want to
promote wide participation of shareholders, ensuring that they are informed
and involved, as they should be. And we want decisions to be made based on
the longer- term view and not just immediate return. We will:
• embed in statute the concept of Enlightened Shareholder Value by making
clear that directors must promote the success of the company for the benefit
of its shareholders, and this can only be achieved by taking due account of
both the long- term and short- term, and wider factors such as employees,
effects on the environment, suppliers and customers;
• introduce a statutory statement of directors’ duties to clarify their
responsibilities and improve the law regulating directors’ conflicts of
interest;
• relax the prohibition on provisions which prevent auditors from limiting their
liability, while delivering further improvements in the quality of the audit;
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Company Law Reform
• enhance the rights of proxies and make it easier for companies to
enfranchise indirect owners of shares;
• remove the requirement for paper share certificates and facilitate the use by
companies of e- communications where their shareholders want this;
• implement the Takeovers Directive that will facilitate takeover activity in the
EU through improved shareholder protection and access to capital markets.
Ensuring better regulation and a “ Think Small First” approach
Although the vast majority of UK companies are small, company law has been
written traditionally with the large company in mind. We want to reset the
balance and make the law easier for all to understand and use. We will:
• provide separate and better- adapted default articles ( the current “ Table A”)
for private companies;
• simplify decision- making for private companies, for example by making it
easier for decisions to be taken by written resolution, and making Annual
General Meetings ( AGMs) opt- in rather than opt- out;
• abolish the requirement for private companies to have a company secretary;
• update company financial and narrative reports;
• simplify the rules about company share capital in particular for private
companies;
• implement some aspects of the European Transparency Directive;
• introduce a power to allow the law to be restated where necessary in future
to make it accessible.
In addition to the changes in the law itself, the Government will be ensuring
that there is appropriate advice and guidance available to users of company
law, particularly smaller firms and their advisors, so that all can understand the
options available to them and the requirements placed upon them.
Making it easier to set up and run a company
We want to remove unnecessary burdens to directors and preserve Britain’s
reputation as a favoured country in which to incorporate. We will:
6
1 Summary
• remove the requirement on most directors to disclose publicly their
home address;
• abolish the requirement for a company to have authorised share capital;
• enable a single person to form a public company;
• streamline the rules on company names and trading disclosures;
• make deregulatory changes to the register of past and present members
which companies are obliged to maintain.
Providing flexibility for the future
• Company law is not static. We intend to introduce a new reform power to
allow updating and amendment as circumstances dictate, subject to
rigorous safeguards for full consultation and appropriate Parliamentary
scrutiny.
Benefits to business
The Government believes that the measures above, by making company law
better fitted to today’s realities, should create improved performance across
the economy as whole, as well as reducing direct compliance costs for business
and producing cost savings which could amount to some £ 250m a year.
How to respond
The Government would welcome views on any aspects of the proposals.
Responses should be sent, by 10 June 2005, by email to:
companylawreform@ dti. gsi. gov. uk
or by letter to:
Patrick Barry
Company Law Reform Bill
5th Floor
1 Victoria Street
London SW1H 0ET
Additional copies of this document are available from The Stationery Office:
telephone 0870 600 5522 or email book. orders@ tso. co. uk
An electronic version is available on the DTI website at
www. dti. gov. uk/ cld/ review. htm
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Company Law Reform
2 Setting the Scene
The Government is committed to ensuring that the legal and regulatory
framework within which business operates promotes enterprise, growth and
the right conditions for investment and employment.
Our system of company law and corporate governance is a critical part of this
framework. It sets out the legal basis on which companies are formed,
operated and managed. It provides the corporate vehicle which enables people
to collaborate in business, and the legal structure through which companies
are financed, ultimately by millions of savers and pensioners. It sets the rules
for company boards and shareholders and for the exercise of decisions on
business growth and investment. And it is the means by which people are held
to account for the exercise of corporate economic power.
For these reasons, an effective framework of company law and corporate
governance is a key building block of a modern economy. A genuinely modern
and effective framework can promote enterprise, enhance competitiveness and
stimulate investment. Conversely, an ineffective or outmoded framework can
inhibit productivity and growth and undermine investment confidence. The
high profile corporate collapses of recent years – including Enron, Worldcom
and Parmalat – have demonstrated the critical importance to the modern
global economy of robust frameworks for corporate activity, and the far-reaching
economic consequences when these fail.
Our objectives
That is why we are committed to creating a modern, enabling and robust
framework for our companies. We are determined to ensure that our system of
company law and corporate governance is one which:
• facilitates enterprise by making it easy to set up and grow a business;
• encourages the efficient allocation of capital by giving confidence to
investors;
• promotes long- term company performance through shareholder
engagement and effective dialogue between business and investors; and
• maintains the UK’s position as one of the most attractive places in the world
to set up and run a business.
8
Global challenge
This last point is critical. Our framework must reflect the challenges of modern
capital markets in which business and investment decisions are increasingly
determined by global conditions. More and more companies are operating
internationally. Increasingly, businesses can make choices as to where to
incorporate, and recent legal judgments are tending to make such cross- border
incorporations easier. Similarly, investors can choose where to put their money
– around a third of stock in listed UK companies is now held by overseas
owners, more than twice the level in 1993.
This increasingly global marketplace is reflected in changes in regulatory
conditions – for example the move towards global convergence of accounting
standards, so that ultimately companies should be able to prepare their
accounts on the same basis, wherever in the world they are listed. It is also
reflected in developments at European level, where there is already a large
body of European law and where the Commission’s Company Law and
Corporate Governance Action Plan is focused on fostering the global efficiency
and competitiveness of EU businesses, strengthening shareholders’ rights and
third party protection and rebuilding the confidence of investors.
The Government supports the Action Plan as a platform for action to remove
barriers to the efficient operation of markets, make it easier for companies to
set up cross- border operations, extend investment opportunities for investors
and improve access to, and the availability of, capital across Europe. As in the
UK, it believes that EU action should be facilitative and enable enterprise
and entrepreneurship to flourish. The aim must be to promote growth,
competitiveness and jobs, not put new barriers in the way of economic activity.
The recent Sarbanes- Oxley legislation in the US, enacted in response to the
Enron and Worldcom collapses, has also had important consequences for
companies and investors around the world.
UK response
In Britain, we have acted decisively to recognise and anticipate these
challenges. In 1998, the Government commissioned the Company Law Review
( CLR), an independent group of experts, practitioners and business people, to
take a long- term and fundamental look at our underpinning system of company
law, to see how it could be brought up to date. Many of the proposals for
legislative change contained in this White Paper are a result of that Review.
The CLR is part of a wider programme of action to facilitate enterprise,
encourage investment, promote long- term company performance and ensure
that Britain remains one of the best places in the world to set up and run
a business:
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Company Law Reform
• we have brought forward the Companies ( Audit, Investigations and
Community Enterprise) Act 2004 ( the C( AICE) Act) to ensure better oversight
and stronger regulation of the accounting and audit profession, to increase
investor confidence in company reporting and enforcement, and to strengthen
powers to investigate companies. The Act has been widely welcomed as a
robust but measured response to recent corporate scandals which strikes
the right balance between strengthening market confidence and avoiding
unnecessarily prescriptive and burdensome regulation. In addition, it
encourages the development of the social enterprise sector by making it
possible to form a new type of company, the “ community interest company”,
whose profits and assets must be used for the benefit of the community;
• we have laid draft regulations which will require all quoted companies to
produce an Operating and Financial Review ( OFR). The OFR is a new form of
narrative report in which companies will need to describe future strategies,
resources, risks and uncertainties, including policies in relation to employees
and the environment where these are relevant to future strategy and
performance. The requirement to produce an OFR represents a further major
step forward in improving company reporting and transparency and in
promoting effective dialogue on the key drivers of long- term company
performance. It also recognises that in a modern economy, those who run
successful companies need to develop relationships with employees,
customers, suppliers and others which support long- term value creation;
• we have introduced the Directors’ Remuneration Report Regulations 2002,
which require quoted companies to disclose and seek shareholder approval
for their executive remuneration policies, and to disclose how remuneration
relates to performance. Recently- published research by Deloittes has
demonstrated that these Regulations have led to substantial and direct
improvements in the transparency of executive remuneration. More
fundamentally, the Regulations have acted as a catalyst for increasing
company accountability and effective shareholder engagement; and
• we have raised the audit thresholds for turnover and balance sheet totals to
£ 5.6m and £ 2.8m respectively, taking some 69,000 companies out of the
requirement to have their accounts professionally audited.
The Government’s approach has not relied on legislation alone. One of the key
strengths of our framework for corporate activity is that it has been developed
in close partnership with market participants. This is reflected in the way we
have worked alongside businesses, professionals and investors in driving
reform and modernisation:
10
2 Setting the Scene
• the Financial Reporting Council’s powers of oversight and enforcement have
been substantially increased and extended by the C( AICE) Act. But it remains
a light- touch, market- led regulator, which derives its funding equally from
listed companies, the accountancy profession and Government and which,
through its Council and Board, operates with the full cooperation and
involvement of companies, investors and the profession;
• under the aegis of the Financial Reporting Council, a new Combined Code
on Corporate Governance was published in July 2003 which incorporates
many of the changes recommended in an independent review by Sir Derek
Higgs, aimed at strengthening the independence and effectiveness of non-executive
directors;
• to promote more active shareholder engagement, particularly where
shareholders have concerns about management, strategy or performance,
the Government welcomed the Institutional Shareholders’ Committee
principles in October 2002, and the commitment to reflect these principles in
fund management contracts and insurance fund practice. The ISC is
assessing the effectiveness of the principles in achieving change and the
Government will take this into consideration when reviewing their impact on
engagement;
• UK institutional investors manage almost half of UK equities, investing
much of the long- term wealth of British savers and exercising indirect
control and significant influence over much of British industry. This
ownership is intermediated through an investment chain of relationships
connecting ultimate owners with their investment in companies. Ensuring
this chain works efficiently is of vital economic importance for productivity
and long term growth, because the chain is a critical mechanism for
ensuring that investment is efficiently allocated. The Government has
systematically investigated how well the investment chain works, notably
through the Myners, Sandler and Higgs reviews, and in the light of the
analyses and recommendations of these reviews, has undertaken a
comprehensive reform programme;
• a separate report by Paul Myners to the Shareholder Voting Working Group
focused on the practical steps which market participants must take to
improve the effectiveness of the voting process and has been well received.
DTI has agreed to implement the report’s legislative recommendations;
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Company Law Reform
• in order to ensure that company accounts are subjected to high- quality and
independent audit, the new Combined Code also strengthens the role of the
audit committee in the light of the report from Sir Robert Smith. Audit firms
have introduced more frequent rotation of audit partners and longer cooling-off
periods before an auditor can be recruited by a client; and
• we have worked alongside business to take forward the recommendations
of Sir Derek Higgs and Laura Tyson aimed at extending the diversity and
effectiveness of company boards. Proposals for further action are set out in
“ Better Boards”, published in December 2004.
Further reform and the Company Law Review
All these developments have contributed to our objective of creating a
modern, enabling framework which facilitates enterprise and market
confidence. But the role played by the underlying law governing the day- to- day
operation of companies remains critical to business competitiveness.
Our company law reform programme is focused on four key objectives:
• Enhancing shareholder engagement and a long- term investment culture
• Ensuring better regulation and a “ Think Small First” approach
• Making it easier to set up and run a company
• Providing flexibility for the future.
Enhancing shareholder engagement and a long- term investment culture
Companies work best where there is a good understanding and effective
engagement between those who own companies, and those who run them
on their behalf. In order to achieve this, roles and responsibilities need to be
clearly defined, and there needs to be efficient and transparent mechanisms
for ensuring that views are heard and decisions taken. Measures in the Bill will
provide better guidance for directors on their responsibilities and duties,
ensure more effective and efficient communication with shareholders, and
make it easier for shareholders, including indirect investors, to exercise their
rights of ownership. These changes are aimed at ensuring that directors and
shareholders can work together in a way which promotes long- term company
performance and value creation.
12
2 Setting the Scene
Ensuring better regulation and a “ Think Small First” approach
Our company law was originally designed for large companies with numerous
public investors. The current companies legislation generally works by offering
smaller private companies exemptions from a fundamental framework which
was designed for larger companies. But today the vast majority of companies
are smaller – often owner- managed – and have different needs, with over 90%
of companies having five shareholders or fewer.
For these companies, laws designed to regulate larger companies with a
publicly- traded share ownership are burdensome and impose unnecessary
costs. Wherever possible, the Government wants the new law to recognise
smaller private companies not as the exception, but as the rule. We will
therefore remove unnecessary burdens on small firms and present the
provisions they use most often in a more accessible way. We will also ensure
that small companies and their advisors can readily access guidance on what
they need to know about the law.
Making it easier to set up and run a company
Compared with many other countries, it is relatively easy and cheap to set up a
company here. The Government believes this is an important benefit to Britain
– start- ups are one of the crucial motors of our economic growth, and more
and more companies from overseas are seeking to incorporate here. But there
are still some procedural requirements that can complicate both the setting up
of a company, and its initial operation – for example, the default requirement
for all companies, even the smallest, to hold an Annual General Meeting, and
the requirement to appoint a company secretary. Where these obstacles can
sensibly be removed, the Bill will remove them.
Providing flexibility for the future
The measures in this Bill demonstrate that law which was appropriate at one
time may become an obstacle when times change. The Government believes it
is crucial that there should be some measure of flexibility built into the company
law framework to ensure that it can be kept up- to- date in future, subject to
appropriate processes of public consultation and Parliamentary scrutiny. The
Bill will provide this.
13
Company Law Reform
The way ahead
The CLR consulted widely with legal experts, business and practitioners in
drawing up its recommendations. As a result the work of the CLR has been
universally recognised as providing an authoritative assessment of the
changes needed to ensure that our framework of company law remains at the
forefront of international competitiveness. For this reason, the CLR’s principles
( and the vast majority of its specific recommendations) are firmly reflected in
the Government’s reform proposals.
In addition the Government has continued to take account of market
developments and to discuss both the general approach to reform, and where
appropriate specific proposals, with the business and legal communities and
wider stakeholder interests. We intend to continue to work in partnership with
these interests in keeping our law responsive and flexible. In particular, we
have consulted extensively on ideas for deregulatory change, with a view to
ensuring that unnecessary burdens are removed wherever practicable. Our
assessment suggests that the proposals for reform set out in this White Paper
will produce savings for business of around £ 250m a year. We would welcome
any responses to this document which suggest additional areas for removing
unnecessary burdens.
Approach to legislation
The Company Law Reform Bill will include amended and restated provisions of
particular importance to small companies in their day- to- day operations. The
Bill will set out the revised provisions in a new, more logical and easily
accessible way. These areas will include such core policy areas as formation,
and meetings and resolutions. It is also intended that the provisions on reports
and accounts should be restated in a more accessible way. Some clauses
which show the approach proposed for the content of small company reports
and accounts are included in this document.
The Bill will also include new provisions setting out the duties of directors.
In other areas, the new Bill will introduce specific amendments to the
Companies Act 1985. However, the scale of these changes and the nature of
the provisions being amended will mean that it will not be necessary or
appropriate always to restate entire areas of that Act in a new form. These are
largely the more technical areas, of greater interest to larger companies, and
the effect of the provisions will be to amend the 1985 Act.
14
2 Setting the Scene
This document provides a description of the policy so that all those with an
interest in the area can understand what is intended. For many areas, draft
clauses are included. ( The draft clauses will not necessarily appear in the Bill
in the order given here). In some areas, detailed clauses are still being worked
on and drafts are not included. Some draft regulations which will be brought
forward in parallel are also included. The DTI website provides a more detailed
commentary on the key clauses ( www. dti. gov. uk/ cld/ review. htm).
The Government welcomes all comments on what is proposed.
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Company Law Reform
3 Enhancing Shareholder Engagement
and a Long- Term Investment Culture
The Government believes that companies work best where the respective roles
and responsibilities of directors and members or shareholders are clearly
understood, where there is effective communication and engagement between
directors and shareholders, and where there are efficient mechanisms for
taking decisions critical to the running of the company.
The Government’s proposals in this area, which are based upon the CLR’s
analysis, therefore aim to ensure greater transparency and accountability
within the company’s operations, and greater opportunity for all shareholders
to play an informed part in company business.
As part of this, the Bill will provide greater clarity on what is expected of
directors, making it easier for all to understand what those duties are. In
particular the Bill will make clear that, while directors must promote the
success of the company for the benefit of its members, this can only be
achieved by taking due account of longer term performance and wider
interests, such as the interest of its employees and the impact of the
company’s operations on the community and on the environment.
3.1 Improving shareholder dialogue
Shareholders have a key role to play in driving long- term company
performance and economic prosperity. Informed, engaged shareholders – or
those acting on their behalf – are the means by which the directors are held to
account for business strategy and performance and by which investment
decisions are taken which reflect the most efficient allocation of capital.
However the investment chain has become increasingly complex, with the
result that communication up and down the chain and the exercise of
ownership rights and responsibilities have become more difficult.
For this reason, the Government has already taken a number of steps to
increase effective shareholder engagement and the efficient working of the
investment chain, including action to require all quoted companies to seek
shareholder approval for the directors’ remuneration report and to produce an
Operating and Financial Review, as well as action in response to the Myners,
16
Sandler and Higgs reviews. We intend to build on these reforms by introducing
a number of measures in this Bill aimed at improving communication with
shareholders and indirect investors and encouraging the exercise of
ownership rights.
Access to timely, transparent company information
It is important that shareholders have access to clear and meaningful
information to enable them to have a constructive dialogue and increase their
engagement with the company in which they hold shares. The Bill will
introduce a number of measures to enhance the timeliness and transparency
of company information and proceedings:
• The holding of the Annual General Meeting ( AGM) will be linked to the
reporting cycle to ensure shareholders have a timely opportunity to hold the
directors to account. The current law requires companies to hold an AGM
once a year and there can be as long a gap as 15 months between AGMs.
The Bill will require public companies to hold their AGM within 6 months of
the end of the financial year.
• Quoted companies will be required to put on their website the preliminary
announcements of their annual results and their full accounts and reports.
This information must be made available to all members of the public and
not just to members.
• Shareholders of quoted companies will have a right within a 15- day holding
period after the accounts become available to propose a resolution to be
moved at the general meeting where the accounts are laid ( usually the
AGM). Such resolutions would be circulated at the company’s expense.
• Quoted companies will also be required to disclose on their websites the
results of polls at general meetings. This will ensure increased transparency
for shareholders, whether as registered members of the company or as
indirect investors, of decisions taken at general meetings.
• Shareholders of quoted companies will also have a new right, if a certain
specified minority so request, to require an independent scrutiny of any
polled vote. The Bill will also provide that the scrutiny report of any poll
must be disclosed on the company’s website.
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Company Law Reform
The Government believes that there is a good case for improving voting
disclosure and wants to see effective accountability by institutional investors.
This will improve transparency and lead to better engagement with companies
by institutional investors. In line with this approach, the Government will
continue to explore the proposal that institutional investors should be required
to disclose how their voting rights have been exercised. The practicalities of
this approach need to be examined against alternatives such as operating
through a statement of principles, such as those issued by the Institutional
Shareholder Committee.
Facilitating e- communications
The use of new information and communications technologies has grown
rapidly over recent years, which presents great opportunities to reduce costs
and enhance the immediacy and transparency of dialogue between companies
and shareholders. These developments were not anticipated at the time that
the majority of the provisions in existing company law were first put in place
decades ago. Existing provisions of company law impose a number of
requirements about the use of paper communications, which can prevent both
companies and shareholders from enjoying all the cost- savings and other
benefits that sensible use of new communications technology can bring. For
example, at present the Companies Act requires companies to send every
shareholder the full annual report and accounts or a summary version. Unless
the shareholder positively opts for electronic communication this must be in
paper. In practice, while many shareholders do not need or want to receive a
paper copy, very few have taken up the electronic option. The resulting costs
of printing and sending paper copies of the annual report can be considerable,
particularly for a large quoted company with tens of thousands or even a
million or more shareholders.
The Government therefore intends to allow all companies, subject to
shareholder approval, to be able to use electronic communications with
shareholders as the default position, permitting ( but not requiring) companies
to use websites and e- mail to communicate with their registered members. Of
course, electronic communication will not suit everyone. Individuals will be
able to request continued communication on paper if they wish. Nonetheless,
the overall reduction in paper circulation expected could produce very
significant cost savings, particularly for companies with large numbers of
registered members.
3.2 Enfranchising indirect investors
When investors – whether major institutional investors or retail investors – buy
shares in a listed company, they are increasingly likely to hold their shares
through an intermediary or a chain of intermediaries.
18
3 Enhancing Shareholder Engagement and a Long- Term Investment Culture
The use of intermediaries makes electronic trading of shares easier and
cheaper, but it can also be a regulatory requirement for example in relation to
shares held as part of ISAs. However, as it is the intermediary’s name that
appears on the company’s register of members, indirect investors risk losing
their governance rights. There is no automatic basis in company law for a
direct relationship between a company and these indirect investors. Instead the
indirect investors may have to rely on contractual arrangements with the
intermediaries to pass on at least some basic information and dividends from
the company and to act on their instructions.
The Bill will therefore enhance the ability of indirect investors – those not
holding legal title to the shares of the company in which they invest – to play a
fuller role in company proceedings.
• Exercising rights through proxy. The Bill will ensure that the registered
shareholder can nominate a proxy or proxies who can, on their behalf,
attend and speak at meetings, demand a poll, and vote on a show of hands
or on a poll. This will enable those indirect investors acting as proxies to the
registered shareholder to exercise all the participation rights which would
otherwise rest with the registered shareholder alone.
• Exercise of governance rights. The Bill will make it easier for indirect
investors to exercise governance rights. Some companies already make
their own provisions through their articles to recognise and enfranchise their
indirect investors, but the present best practice can involve considerable
detailed bespoke legal advice and drafting to set out complex provisions in a
company’s articles. This is expensive and time consuming. In future where a
company makes provisions in its articles to enfranchise indirect investors,
then to the extent provided in the company articles, reference to registered
members and their rights in primary legislation should be extended to
include those designated by the registered member. The end result will be
greater parity of treatment in law for registered members and indirect
investors for the exercise of governance rights as specified in the company’s
articles.
• Right to information power. In addition, the Bill will include a reserve power
for the Secretary of State to compel some or all public companies to provide
information – electronically – to persons having an interest in shares if the
registered member requests. At present the intermediary, as the registered
member, is only entitled to one set of information and, if this is all it
receives, it cannot currently pass this on to all the indirect investors. Some
companies are happy to provide more copies, but others have been
reluctant because of the cost involved. Some intermediaries also have not
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Company Law Reform
wanted to incur the costs involved in mailing the information out to the
indirect investors. However, it is now increasingly reasonable to assume that
indirect shareholders will have access to the internet. Electronic delivery
avoids most of the costs of paper, is much quicker and more practical
particularly when forwarding through a chain of intermediaries. It is
anticipated that the Secretary of State’s power will only be exercised if the
market does not develop appropriate solutions to ensure that indirect
investors have access to information they require to engage in the
governance of the companies in which they invest.
3.3 Directors
Directors’ duties
The general duties which directors owe to the company are at the moment
found in case law – i. e. decisions in individual court cases over the years –
rather than in the Companies Act. As a result, those who become company
directors may do so without understanding their obligations under the law.
Those obligations may also not be understood by the members of the
companies, in whose interests the directors should be acting. Both the CLR and
the Law Commissions believed that there was a need to make the law in this
area more consistent, certain, accessible and comprehensible, and
recommended that there should be a statutory statement of directors’ general
duties. The Government agrees that directors’ duties are fundamental to
company law, and that it is very important that the duties are widely known
and understood. The Bill will therefore introduce a statutory statement of
directors’ general duties.
• The statutory statement of duties will replace existing common law and
equitable rules. The duties will be owed to the company, and – as now –
only the company will be able to enforce them. ( In certain circumstances,
the shareholders may be able to bring a derivative action, albeit essentially
for the company’s benefit.)
• The statement of duties will be drafted in a way which reflects modern
business needs and wider expectations of responsible business behaviour.
The CLR proposed that the basic goal for directors should be the success of
the company for the benefit of its members as a whole; but that, to reach
this goal, directors would need to take a properly balanced view of the
implications of decisions over time and foster effective relationships with
employees, customers and suppliers, and in the community more widely.
The Government strongly agrees that this approach, which the CLR called
“ enlightened shareholder value”, is most likely to drive long- term company
performance and maximise overall competitiveness and wealth and welfare
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3 Enhancing Shareholder Engagement and a Long- Term Investment Culture
for all. It will therefore be reflected in the statement of directors’ duties, and
in new reporting arrangements for quoted companies under the Operating
and Financial Review Regulations.
• The statement will address circumstances where there is a conflict between
a director’s duties to the company and his or her personal interests or duties
to others. It is important however that the duties do not impose impractical
and onerous requirements which stifle entrepreneurial activity. The CLR
recognised that this might happen in circumstances where a director wished
to exploit a business opportunity which might also be exploited by the
company. Normally at the moment directors have to obtain the members’
agreement, even if the company does not wish to exploit the opportunity or
has already decided to abandon the opportunity. The statutory statement
will implement the CLR’s recommendation that the company’s rights might
be waived by the board, acting independently of any conflicted director.
• At present, there are a number of remedies for breaches of the duties,
including the payment of damages by way of compensation where the
director’s action is considered negligent and the restoration of company
property where assets have been misappropriated. The statement of duties
will not change this.
• The statutory duties will apply to all persons acting as director. They will
also apply to shadow directors, although there will be aspects of the duties
that must apply differently to shadow directors.
• It is important that the statement of duties enables the law to respond to
changing business circumstances and needs. It will therefore leave scope for
the courts to interpret and develop its provisions in a way that reflects the
nature and effect of the principles they reflect.
• The statement of duties should be widely accessible and understood. The
Government will therefore publish plain language guidance explaining the
statutory duties.
Regulating directors’ conflicts of interest
Part 10 of the Companies Act 1985 contains a variety of provisions designed to
deal with situations in which a director has a conflict of interest. The provisions
are intended to clarify the director’s general duties to the company in areas
where conflicts of interest commonly arise, such as the making of loans by a
company to a director.
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Company Law Reform
The present mixture of regulation in Part 10 has grown up piecemeal, without
any attempt to look at directors’ transactions with their company in the round.
As a result, the provisions of Part 10 are widely regarded as excessively
complex and fragmented. The Government does not favour repeal of these
provisions: as respondents to the CLR and the Law Commissions made clear,
codification of the general duties will not in itself prevent the abuses which
caused these provisions to be enacted. We have also been mindful of the
argument that directors may find better guidance in clear statutory rules than
in general principles. At the same time, it is clear that Part 10 is in need of
major reform, and the Bill will restate, as well as amend, the current
requirements. We have had five main aims in our reform of Part 10:
• the Bill will simplify the overall structure, so that the provisions are more
accessible to directors and other users. In particular, types of transaction
requiring shareholder approval – including property transactions; loans,
quasi- loans and credit transactions; and ex gratia payments for loss of office
– have been brought together; and, where appropriate, the clauses have
been drafted so as to facilitate comparison between the requirements in
these areas;
• the Bill will deregulate where the existing provisions are unnecessary or
excessive. In particular, companies will be able to make loans to directors
with the consent of shareholders. This is a significant reform which will
provide a simple and, in many cases, readily applicable method of ensuring
compliance;
• the Bill will remove existing loopholes e. g. by requiring directors to disclose
the interests of connected persons if they would have to be disclosed if they
were the director’s interests, and by broadening the definition of a director’s
service contract in relation to the requirement that they be open to
inspection by shareholders;
• the Bill will reflect modern business behaviour e. g. by requiring disclosure
of interests to other directors as soon as is reasonably practicable, and by
giving shareholders the right to receive copies of directors’ service contracts
on payment of a fee; and
• the Bill will clarify the law where the existing provisions are unclear or
incomplete e. g. by making it clear that the rules relating to ex gratia
payments for loss of office do not extend to payments that a company is
bound to pay to a director on his retirement or other loss of office because it
has a legally binding obligation to do so.
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3 Enhancing Shareholder Engagement and a Long- Term Investment Culture
Disclosure requirements can play an important role in the regulation of
directors’ conflicts of interest, but it is important that such requirements are
proportionate and not excessively complex. Parts 2 and 3 of Schedule 6 to the
Companies Act 1985 currently set out the information about loans and other
dealings in favour of directors which must be provided in the notes to a
company’s annual accounts. The information required is extensive and the
provisions not properly understood by many directors and users of accounts.
The Government is therefore considering whether the requirements relating to
disclosure of transactions in which directors are interested might be simplified
without any loss of necessary protection to shareholders.
Directors’ liability
The law on directors’ liability needs to strike a careful balance: on the one
hand, the law must be firm and robust to deal fairly with cases where
something has gone wrong, as a result of either negligence or of dishonesty;
on the other, Britain needs a diverse pool of high- quality individuals willing to
assume the role of company director, and a willingness by directors to take
informed and rational risks.
The Government consulted on these issues in December 2003. In the light of
the responses, it introduced two important reforms through the C( AICE) Act
2004. These are the most significant changes to the law on directors’ liability
for nearly 80 years. As a result from 6 April 2005 companies may:
• indemnify directors against most liabilities to third parties; and
• pay directors’ legal costs upfront, provided that the director repays if he or
she is convicted in any criminal proceedings or judgement is given against
him or her in any civil proceedings brought by the company or an
associated company.
The response to these reforms has been very positive, and we believe that
they address the most important issues raised by respondents to the
consultation.
Some consultees also favoured further reform of the law to permit companies
to limit directors’ liability to the company for breach of the duty of care, skill
and diligence. The Government explained in Parliament that this would need
to be considered alongside the statement of directors’ duties now set out in
draft in this White Paper. It would for example be possible to permit
shareholders if they wished to agree some limit on directors’ liability for
negligence without permitting them to limit the liability of any directors who
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Company Law Reform
put personal interests before their duty to the company. The Government will
continue to consider whether concerns about potential liability for negligence
are affecting director recruitment and behaviour, and, if so, whether such
concerns justify a further change in the law.
Who can be a director?
One of the flexibilities of British company law is that it allows all legal persons
( for example, other companies) to be company directors in the same way as if
they were individuals. This flexibility can sometimes be abused by those who
wish to conceal who is controlling a company ( for example those intending to
commit fraud may use a company with corporate directors to help obscure the
identity of the individuals involved), and the Government considered the
option of banning corporate directors. Equally however, an outright ban might
harm those companies who make use of the current flexibilities for entirely
legitimate reasons.
We therefore propose that the Bill should include a requirement that at least
one director be a natural person. This provision is intended to ensure that
every company will have at least one individual who can, if necessary, be held
to account for the company’s actions. It is also consistent with the increased
thrust being placed in the Bill on the importance of directors understanding
their statutory duties.
Each company can set its own rules for who appoints its directors. It is for the
company to ensure that it appoints persons who not only understand their
duties but also take full responsibility for their actions and omissions. The Bill
will therefore remove the restrictions on directors over 70 years old, at the
same time as providing that 16 will be the minimum age for a director. This
prohibition of child directors will need transitional provisions. In particular, any
child under 16 appointed after publication of this White Paper will not be
entitled to financial compensation in respect of early termination from office
resulting from the introduction of the prohibition.
3.4 Minority shareholder rights
Derivative actions are the route by which shareholders, usually minority
shareholders, are able to enforce the company’s rights where directors have
breached their duties, ( since in these circumstances it is unlikely that the
directors, who usually act on behalf of the company, will want to take action).
They are therefore an important mechanism by which shareholders can hold
directors to account for the proper exercise of their duties in pursuit of their
company’s short and long- term interests. Derivative actions are currently
available to shareholders in certain circumstances as a matter of common law,
not statute.
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3 Enhancing Shareholder Engagement and a Long- Term Investment Culture
The Bill will therefore put derivative actions on a statutory footing. This
proposal has been recommended by the Law Commission and endorsed by
the CLR. The Bill will also clarify the complex provisions on alteration of class
rights, and extend them to companies without share capital.
3.5 Auditor liability and audit quality
The Government is keen to encourage confidence in the statutory audit and to
ensure a strong, competitive and high quality audit market. To help in this,
over the course of the past two years the Government has promoted debate to
identify further ways by which these goals can be achieved.
In the aftermath of a company failure, those who have suffered losses may
look to the auditors as having the “ deepest pockets” of all of those they can
pursue for compensation. Consequently, the auditor may bear 100% of the
compensation even though the auditors’ “ share” of the blame ( when
compared to other culpable parties) may be less. Theoretically, this makes
audit firms vulnerable to very large claims where they are held to have been
negligent in their conduct of an audit. In practice, however, most claims are
settled out of court.
In December 2003, the Government launched a public consultation on director
and auditor liability. This showed clear support for changes to the law on
directors’ liability, and appropriate provisions were included in the Companies
( Audit Investigations and Community Enterprise) Act 2004. These come into
force next month. The responses on auditor liability were more mixed and the
Government concluded that it would be inappropriate to permit the capping of
auditors’ liability to a predetermined amount. However, it invited auditors, their
clients and investors to work together to consider other approaches by which
liability might be limited, and in parallel to identify ways to improve audit
quality and enhance competition. The Government is grateful for the helpful
and constructive approach adopted by all contributors.
In the light of that work, the Government is now persuaded of the benefits of
change. The reforms will have three key parts – firstly, legislating to allow
shareholders to agree limitations to the liability of auditors; secondly, some
specific improvements to the quality of the audit process; and, thirdly, the
establishment of an on- going process by which further enhancements to quality
and competition can be identified and then implemented. The Government sees
these three parts making up a balanced package of measures to improve the
audit market, and believes it is important that all of these go forward together.
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Company Law Reform
The Government believes that it would be inappropriate to change the law on
who can sue the auditors in the civil courts. However, given the wider
importance of audited financial statements, the Government proposes to make
it a criminal offence knowingly or recklessly to give an incorrect audit opinion.
Proportionate liability by contract
The Government proposes that shareholders should be able to agree a limit to
the auditor’s liability for damage incurred by a company, to such an amount
that is determined by the Courts to be just and equitable, having regard to the
relative extent of responsibility of the auditor for the damage incurred.
Specifically, the Government proposes that:
• such a limitation would apply in situations where damage to the company
has been caused through the ( mis) conduct of an audit, to the extent the
Court considers just and equitable in the circumstances of the case;
• the company would be left to recover, as part of a separate action, the loss
suffered for which some other defendant ( e. g. another professional advisor)
was responsible;
• the auditor would continue to be fully liable for any fraud to which he or she
was party;
• the company could not agree in advance a monetary limit to the auditor’s
liability. This means there would be no scope for maxima set as cash sums,
or expressed in accordance with a quantifiable formula ( for example, as a
multiple of the audit fee); and
• only those causes of action arising after the commencement of the
legislation would be subject to the proposed provisions.
In practical terms this would mean that, as now, with the authority of the
shareholders, the directors of the company would negotiate the scope, terms
and cost of the audit contract. The directors would decide how much weight
should be given to factors which might influence the terms of the audit, such
as the cost and availability of insurance, the attitudes to risk of the directors,
shareholders and auditors and the directors’ perception of the level of
competition between audit firms. In addition, if the shareholders had given
explicit agreement, the contract with the auditors could include a limitation of
the auditor liability as set out above. The Government proposes that
shareholder agreement to such limitation should be required each year and
in advance of each year’s audit.
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3 Enhancing Shareholder Engagement and a Long- Term Investment Culture
The Government also proposes that the existence of any limitation of liability
would be shown in the company’s annual financial statements. The auditor
should also provide a list of all companies with which it has agreed a limitation
of liability in its own annual financial statements.
Improvements in audit quality and value
The Government welcomes the four specific proposals from auditors, their
clients and investors for improvements in audit transparency and to support
shareholder involvement in the audit process.
These initiatives are:
• Publication of audit engagement letters: there is widespread support for
publicly disclosing the content of audit engagement letters. This will
increase transparency and enable third parties to understand better the
scope of the audit and the terms on which it has been undertaken.
• Shareholders rights to question auditors: it has been proposed that
shareholders be able to question auditors about the audit. The Government
is considering proposals that, building on recent changes in Australia, might
involve enabling shareholders to question the auditor in advance of AGMs,
or by writing to the auditor, via the company, with reasonable questions. All
queries must relate to the auditors’ report or to the conduct of the audit.
• Publication of auditor resignation statements: there is widespread support
for fuller disclosure of information in auditors’ resignation letters, to enable
investors to understand the reasons for the resignation. The law currently
requires an auditor either to state that there are no circumstances connected
with his or her resignation that need be brought to the attention of members
or creditors of the company, or else to set out the circumstances for the
company to circulate. Experience suggests that the risks of legal action may
be inhibiting the frankness of such statements, and all concerned are keen to
improve transparency.
• Audit lead partner’s signature on audit reports: finally, it has been
recommended that the lead audit partner on an audit should be required to
sign and print his or her own name on the audit report, in addition to the
name of the audit company undertaking the audit. It is expected that this will
serve to improve audit standards by encouraging further personal
responsibility for the actions taken by the audit team.
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Company Law Reform
The Government welcomes in principle these initiatives and the Financial
Reporting Council and the Department of Trade and Industry are taking them
forward. It is intended that any necessary changes to the law will be included
in the Bill, alongside the provisions on auditor liability.
Longer- term reform
The Government is grateful to the Institute of Chartered Accountants in
England & Wales ( ICAEW) for helping establish a “ quality forum”. The
Government believes that this advisory body, made up of representatives of
auditors, investors, business and regulatory bodies, is playing a valuable role
in facilitating communication between business, auditors and investors, and
generating practical ideas to improve audit quality.
The Government and the Financial Reporting Council will be working with
stakeholders to continue to identify further ways in which quality and
competition in the audit market can be enhanced.
3.6 Company Takeovers
The Takeovers Directive – which completed the European legislative process in
April 2004 – lays down minimum standards for takeover regulation across the
Community, and applies many of the core values of the UK system at the EU
level. It will also reduce barriers to takeovers in the Community through
improved shareholder protection and access to capital markets.
Takeover regulation in the UK has been overseen by the Takeover Panel,
essentially on a non- statutory basis, for the past 36 years. Implementation of
the Takeovers Directive requires the introduction of a statutory framework but
the intention is to preserve the independence and authority of the Takeover
Panel and its capacity to make and enforce rules regulating takeover activity.
The Department published a consultative document – available at
www. dti. gov. uk/ cld/ current. htm – on 20 January 2005, setting out proposals for
implementing the Directive. The consultation period is open until 15 April 2005.
The Bill will include provisions to implement the Takeovers Directive and place
the Takeover Panel on a statutory footing. The precise nature of these
provisions will be determined in the light of the responses to consultation.
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3 Enhancing Shareholder Engagement and a Long- Term Investment Culture
4 Ensuring better regulation and a
“ Think Small First” approach
4.1 Improving accessibility
Clearer structure and language
Although the vast majority of UK companies are small, company law has been
written traditionally with the large company in mind. The provisions that apply
to private companies are frequently expressed as a tailpiece to the provisions
applying to public companies. Examples of this include the frequently
consulted current Part 7 of the Act ( Accounts and Audit), which many users
find hard to follow, and the provisions on meetings and resolutions, which are
currently structured largely on the basis of the needs of larger ( public)
companies, with smaller ( private) companies covered by way of additional
provisions or exceptions.
The Government intends that the Bill should reset the balance and make the
law easier for all to understand and use. The Bill will therefore be structured in
such a way that the provisions which apply to small companies are very much
easier to find. Where the law is hard to understand, there are significant costs,
uncertainty and risks and compliance is reduced. The Bill therefore seeks to
achieve much greater simplicity and clarity of language.
This policy runs as a thread through the drafting of all the provisions of the
new Bill and, wherever possible, it is intended that the new law should be
presented in an accessible and user- friendly fashion. In particular, where the
Bill is making substantive changes with the effect of replacing entire portions
of the existing Act, the opportunities for presenting the new law in a simpler
and more coherent way are great and have been fully taken up. The
Government believes that these areas, in particular those relating to company
formation, and to meetings and decision- taking, are now more clearly and
logically drafted. Reporting requirements for small companies have also been
set out in a much clearer way. Consultation has confirmed that these areas are
also those which smaller firms, in particular, find most important in their day-to-
day operations, and the benefits of achieving more accessible law should be
correspondingly significant.
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Company Law Reform
Better guidance
Many parts of company law are nevertheless inherently complex and if we are
to make it easier to understand for both companies and their advisors it is
important that it is supplemented by clear and comprehensive guidance.
Companies House already provides extensive and well respected plain English
guidance both in booklet form and increasingly through their website. We
intend to increase the coverage of this guidance. It will in future include
aspects of company law that go beyond a company’s responsibilities in
relation to Companies House, for example, we will publish clear new guidance
on the important area of directors’ duties. Guidance will also follow the
principles of “ Think Small First.” The great majority of companies are small
and we will write the guidance to meet their needs so that they can easily
identify the basic day- to- day requirements that apply to them.
Improved website
Since its introduction in 1997, the Companies House website has been used by
a growing number of customers and is now accessed by 4 million customers
monthly. Companies House are committed to further improvements to their
website, including a wider range of web- based guidance, better links to related
websites and on- line access to up to date companies legislation. Companies
House will be offering web incorporation during 2007 and this will be
supported by easier access to relevant material, for example, the new
simplified private company articles of association.
4.2 Resolutions and meetings
Much of company law still assumes that the general meeting is the forum by
which shareholder decisions are taken. The law is also written from the
perspective of the public company with derogations for the small, private
company. The Bill will include measures to streamline company decision-making
processes and to bring them more into line with the realities of
modern business life. Provisions relating to decision- taking will be restated in a
form that should make it easier for the small, private company to understand
the basic definitions and requirements for passing a resolution, with additional
requirements for public and then quoted companies holding general meetings
following on.
Annual General Meetings
Company law requires all companies to hold an AGM at least once a year and
other meetings as required. Private companies may opt to dispense with
AGMs, but only if all their members agree.
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4 Ensuring better regulation and a “ Think Small First” approach
The CLR discussed the possibility of also enabling public companies to opt out
of the requirement for AGMs, providing their members were unanimously
agreed. In practice, further consultation suggests that there are unlikely to be
many, if any, public companies in a position where not one single member
wished to hold an AGM. There is thus likely to be very little to be gained by
creating necessarily complex rules as to how a company might opt out of the
requirement. The Government therefore proposes that AGMs should remain a
statutory requirement for all public companies, as now.
However, it is clear that for many private companies, particularly smaller ones
with very limited shareholdings, any obligation to hold an AGM is redundant
and potentially burdensome. The CLR recognised this, and suggested that, as a
default, private companies should not be required to hold AGMs, but that there
should be a mechanism for opting into a statutory regime. Further consultation
has indicated that it will be simpler, and equally effective, not to include any
opting in or out mechanism for private companies. It follows that private
companies will not be required to lay their accounts or to appoint an auditor,
if they have one, at an AGM. No special statutory provision is needed for those
companies which wish to continue to hold AGMs, to lay their accounts and
appoint an auditor, if they have one, at the AGM. They will be able to
incorporate the necessary provisions into their constitution voluntarily if they
so wish.
Written resolutions
The Bill will make it easier for private companies to take decisions by written
resolution. It will provide that in future, a simple or 75% majority of those
eligible to vote will be required for a written ordinary or written special
resolution to be passed, rather than unanimity. This reform should enable
most small private companies to take decisions more quickly and efficiently
and, together with the proposal to remove the requirement for private
companies to hold AGMs, should relieve many small private companies from
the burden of having to hold formal general meetings.
It should be noted however that shareholders will still have the right to call a
general meeting if they wish. The 2002 White Paper sought views on whether a
single member should be allowed to require an AGM, the laying of accounts
and reappointment of an auditor. In light of the consultation and concerns that
such a power might undermine the deregulatory purpose of these core
reforms, the Bill proposes only to retain the existing provision whereby
members holding 10% of the vote will be able to requisition a general meeting.
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Company Law Reform
Simplification of notice periods and short notice requirements
At present, a minimum of 21 days’ notice must be given for an AGM and 14
days for an Extraordinary General Meeting ( except in the case of an unlimited
company). The Bill will equalise the minimum notice period for all company
meetings to 14 days. Companies may set a longer notice period if they wish
and it is anticipated that listed companies subject to the Listing Rules will
observe the Combined Code requirements on minimum notice periods for
meetings.
As now, companies can also hold meetings at shorter notice if holders of a
sufficient majority of shares or voting rights agree. This majority is currently
set at 95%, though private companies may elect to reduce the majority
required to 90%. The Bill will make this figure the default for private
companies, so that members holding 90% of voting rights should be able to
agree to a meeting being held at short notice.
Unanimous consent
The Bill will not codify the principle of “ unanimous consent”. This common
law principle provides that any decision taken ( however informally) by all of a
company’s shareholders together constitutes a decision of the company.
Unanimous consent is fundamental to our company law, and it has not been
proposed that any alterations should be made to the substance. The CLR did
suggest that it would be helpful to codify the principle in statute but, as
discussed in the 2002 White Paper, work has suggested that the attempt to do
so would risk constraining the flexibilities which the principle currently
provides.
Dispersed meetings
The CLR also suggested that there was a case for clarifying in law what
constitutes a “ meeting” and that it should make clear that companies can use
more dispersed forms of ” meeting” involving real- time, two- way
communication between all participants. However, common law already allows
a valid general meeting to be held using overflow rooms with audio- visual
links to enable participants to see and hear what is going on in the other
rooms and to be seen and heard by those in other rooms. It is likely that, as
new technologies allow, market practice on how general meetings are held will
continue to develop, and case law will continue to develop. While it is clearly
important that companies should be able to make use of new technologies
where appropriate, there does not seem to be a need for new legislative
provision in this area.
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4 Ensuring better regulation and a “ Think Small First” approach
4.3 Company constitutions
A feature of GB company law is that the members are free, subject to certain
legal constraints, to make their own rules about the internal affairs of their
company. These rules are a key part of a company’s constitution and can
generally be found in a company’s articles of association (“ articles”).
Although companies have considerable freedom to include whatever rules
they see fit in their articles, in practice the articles tend to contain provisions
on a relatively restricted range of matters, for example rules on decision taking
by the members and directors and various matters connected with shares
( such as the payment of dividends).
Since 1856, model articles have been provided for certain types of companies
by law, for example, Companies Act 1985 Table A (“ Table A”) provides model
articles for companies limited by shares. Table A operates as a “ default” set of
articles for all such companies: that is, the articles of a company limited by
shares will be set out in Table A if the company does not register articles at
Companies House, or to the extent that any articles which it does register do
not exclude or modify the provisions of Table A.
Table A – reasons why this is no longer an appropriate form of model articles
Table A has been revised several times over the past 150 years or so, but it
remains a product of the mid- 19th Century both in terms of the language that it
uses and in substance. It is drafted with what we would today think of as
“ public” rather than “ private” companies in mind and successive revisions to
Table A have tended to include increasingly elaborate provisions, designed to
cover every conceivable event or set of circumstances that a company may
find itself in ( however unlikely it is that the majority of companies who are
using Table A would ever find themselves in those circumstances).
The result is that the vast majority of the provisions in Table A are irrelevant to
the vast majority of companies who are using Table A as their articles. In
addition, whilst many new provisions have been added to Table A over the
years, redundant provisions have rarely, if ever, been removed.
We are left with a “ one size fits all” approach to the model articles, which has
a number of problems:
• Table A is user- unfriendly, poorly laid out and often unintelligible to non-specialists;
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Company Law Reform
• much of Table A is taken up with matters which are remote from the
concerns of smaller companies ( so that it is not unusual for private
companies to have articles which are completely irrelevant to the owners
and managers of such companies);
• Table A does not take account of relatively recent changes in the law, for
example, the introduction of single member companies, and will need also
to reflect further changes which are proposed in this White Paper.
Following the recommendations of the CLR, the Government considers that
reform of Table A is an important part of making our company law fit for
purpose in the modern economy. The Government proposes that in future
there should be:
• a radically simplified set of model articles for private companies limited by
shares, reflecting the way that small companies operate;
• a separate set of model articles for public companies limited by shares
( similar in scope to the current Table A, but with clearer layout and drafting);
• ( for the first time) a full set of model articles for private companies limited
by guarantee; and
• comprehensive, clear and concise guidance for small companies who are
using, or thinking of using, model articles.
For companies set up under the new legislation, the new sets of model articles
will operate as default provisions for the types of company for which they are
prescribed, in the same way as Table A now does. Existing companies will be
able to replace their current articles ( whether or not these are as set out in
Table A) with the new model articles, if their members pass a special
resolution to do so.
The private company articles
The Bill will contain a power for the Secretary of State to prescribe, by
secondary legislation, stand alone model articles for public companies, private
companies limited by shares and private companies limited by guarantee.
Draft model articles for private companies limited by shares ( the “ private
company articles”) are set out in the White Paper.
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4 Ensuring better regulation and a “ Think Small First” approach
The private company articles will replace Table A for those private companies
limited by shares which are in future formed under the new Act and will play
an important role in the simplification of the law for small companies. Like
Table A the private company articles will apply by default where a company
does not register its own articles at Companies House ( to the extent that the
company in question has not specifically excluded or modified the model
articles). Table A will continue to provide the model articles for companies
formed before the new model articles come into force.
The text of the private company articles follows the principles set out in the
CLR’s Final Report, for example, archaic and legalistic language has been
avoided. In the interests of producing a “ leaner” set of model articles and
making the model articles more accessible to the directors and shareholders of
small companies, we have omitted model articles on areas of law for which
there are already procedural rules in the Companies Act ( for example, the draft
model articles do not contain any provisions on decision- taking by
shareholders – see below).
Will the private company articles be suitable for all private companies?
The private company articles contain the minimum number of rules which it is
envisaged that a typical private company limited by shares will need and
which the shareholders will want to have. ( There is little point having a default
rule if the majority of companies will want to disapply it). They are primarily
aimed at small, owner- managed companies.
Some or all of these rules may be suitable for less typical private companies,
but if they are not, it will be open to any private company limited by shares
which is using, or intends to use, the private company articles to add to,
amend, or delete rules from the model articles as they see fit ( as is the case
with Table A), or to adopt completely different “ bespoke” articles of their own.
Articles on decision- taking by members
The private company articles do not include equivalent articles to the Table A
provisions on general meetings. It is envisaged that the majority of private
companies will want to take advantage of the new written resolution procedure
and as such the majority of private companies limited by shares are unlikely to
need detailed rules on the procedure for calling, and the conduct of, meetings
of the company’s members.
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Company Law Reform
If the members of a private company want or need to have a meeting ( for
example, the written resolution procedure cannot be used for resolutions to
remove auditors or directors), all of the provisions necessary for the conduct of
such meetings will be in the Act ( although it should be noted that the
provisions in the Act will be different from the current default position in Table
A in a number of respects).
The public company articles will make detailed provision for meetings and
private companies will be able to incorporate these provisions into their
articles if they find them useful.
Draft guidance notes on the private company articles
By the time that the private company articles come into force, guidance on the
new model articles ( and other linked areas, for example, conflicts of interest
and special resolutions) will be available from Companies House. An
illustration of the types of things that will be set out in the guidance on the
model articles is at Annex B.
The draft guidance has been drafted with the benefit of informal consultation
with Companies House and small firms advisory bodies. In line with feedback
received from consultees the draft guidance seeks to explain, in plain English,
what articles of association are and how the private company articles work
( rather than giving a detailed commentary on each of the individual model
articles – which are written in plain English and are intended to be self-explanatory).
The public company articles
Separate model articles will be provided for public companies ( the “ public
company articles”). In terms of content, these will be similar to the existing
Table A ( that is, the public company articles will include more detailed rules to
cater for more complex circumstances), but will be drafted in plainer English
and updated to reflect changes in the law. Private companies which find that
the new private company articles fail to address their needs will be able to
import provisions from the public company model on a voluntary basis.
4.4 Dematerialising share certificates
It has been possible since 1996 for quoted company shares to be held in
secure electronic form, and shares representing around 85% of the value of the
UK equity market are now held this way. However, around ten million retail
shareholders continue to hold their shares in paper form. An industry working
group has suggested that there would be long term cost savings for everyone
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4 Ensuring better regulation and a “ Think Small First” approach
– including retail shareholders – if all quoted company shares were held
electronically, and that such a move would help to maintain London’s pre-eminence
as a European financial centre. The Government therefore wishes to
make sure that company law requirements do not stand in the way of a move
towards a fully dematerialised securities market, and has invited all interested
parties to develop the ideas further. The Government would be willing in
principle to include provisions in the Bill which would permit companies to
stop issuing paper share certificates. Such legislation would not prevent retail
shareholders from continuing to hold their shares directly, with their names on
the company’s register of members.
4.5 Company secretaries
The Government agrees with the CLR’s recommendation that it should no
longer be a requirement for private companies to appoint a company
secretary. Shareholders will of course continue to be able to require that a
company secretary be appointed, if they so wish, or they may choose to let
their directors decide. However, for the vast majority of companies ( particularly
those which only have one shareholder), a company secretary is almost
certainly unnecessary.
4.6 Offences
The approach to sanctions in the Bill will follow closely the suggestions made
by the CLR for a clearer, more accessible, and more consistent approach across
the legislation. Key elements of the proposed approach include refinements to
the “ officer in default” framework, to make it clear which individuals in which
circumstances may be liable for a breach, and a shift towards the removal of
criminal liability from the company itself in certain circumstances.
The approach to the overarching “ in default” framework – in other words, the
question of which individuals should generally be liable for breaches of legal
requirements in which circumstances – is very much in line with the CLR and
the previous White Paper.
Officer in default
In essence directors should normally be liable where they authorise,
participate in, permit, or fail to take active steps to prevent ( including
monitoring failures where appropriate) a default. De facto directors will be
covered on the same basis.
Secretaries should be liable, if directors have properly charged them with the
relevant function ( or if the function has been conferred on them by the
articles), where they authorise, participate in, permit, or fail to take active steps
to prevent the default.
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Company Law Reform
The CLR recognised the importance of ensuring that those whom they termed
managers ( a further category of company officer, beyond directors and
secretaries) did not escape potential liability. In simple terms, these should be
those who a) are relatively senior employees, with a policy and decision-making
role which can affect the enterprise substantially and b) have
responsibility for the function which is the subject of the breach. The draft
clauses give effect to this policy by using the term “ senior executive” which
it is felt more accurately describes the category of person envisaged. This
category of senior executive will generally cover senior employees within the
company, but not ( on the whole) external third- parties.
The CLR also suggested that a further category, delegates, should have liability
on a case by case basis. By delegates is meant individuals to whom a particular
function has properly been delegated, by or under the authority of the directors
or secretary. Consultation suggested that the previous White Paper drafting
may not have been sufficiently clear on the circumstances in which a delegate
might be liable. The new draft clauses are designed to make clear that, for
delegation to be “ proper”, it must be reasonable in all the circumstances.
It is also important to be clear that delegation will not be the same as
assignment. In other words, even a “ proper” act of delegation will not remove
potential liability from those delegating, albeit they would be able to adduce
the delegation as evidence of their having taking reasonable steps to secure
compliance. Decisions on whether delegates should be targeted in a particular
offence can only be decided on a case by case basis. For example, if a
statutory function is one which many companies often and reasonably
outsource to informed third- parties, it may well be appropriate that those third
parties should be brought within the frame of liability for breach. Offences
where it is suggested that delegates should potentially be liable are noted in
Annex D.
Liability of the company
The CLR also suggested that there should be a presumption against liability
falling on the company itself where ( for certain types of offences) the criminal
act was capable of seriously damaging the company, and liability on the
responsible individual would provide a sufficient deterrent; or where
meaningful and effective alternative sanctions exist. This would ensure that
liability was better targeted, and would avoid imposing a penalty on the
company, and thus the shareholders, where the fault was entirely that of
specific company officers. Offences for which it is suggested that the company
itself ( as opposed to its officers) should no longer be liable are also noted at
Annex D.
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4 Ensuring better regulation and a “ Think Small First” approach
Enforcement
Targeting sanctions on a company’s officers will make it essential that every
company complies with the requirements to have officers, and the new
requirement that at least one director be a natural person. Every week,
Companies House writes to over 800 companies that do not meet the present
requirements. In most cases, either the company is defunct and is
subsequently struck- off the register or the company rectifies the omission.
But there is a continuing problem with companies that continue to carry on
business despite having no director, or at least none notified to Companies
House. The Government proposes to give the Registrar of Companies power to
issue a notice requiring a company to comply with the requirement within a
specified period. There will be a criminal sanction, falling on the company, for
failure to comply with the notice.
Other sanctions changes
As recommended by the CLR, the Secretary of State’s power to bring
proceedings on a company’s behalf ( Companies Act 1985 Section 438) will
be repealed, and the penalty for fraudulent trading ( Section 458) will be
increased from seven to ten years.
4.7 Register of members
Companies’ registers of members are an integral part of their constitutional
apparatus. They are necessary to ensure that the members can be contacted,
whether by the company, by other members, or by others such as those
wishing to make a takeover bid or otherwise wishing to influence the members
in their exercise of their rights as members. Company law therefore requires
companies both to maintain registers with essential contact details and, for
companies with share capital, information about size of holdings, and also to
make these registers publicly available. The Bill will make some deregulatory
changes to the requirements to make it easier for companies to maintain their
registers without affecting their usefulness.
The Bill will keep the public right both to inspect and to obtain a copy of a
company’s register of members, supported both by the ability to apply for a
court order if the company refuses. There have been instances where these
rights have been abused, for example using intimidation of shareholders to
force a company to withdraw from a contract. The Serious Organised Crime
and Police Bill includes measures to address such intimidation directly.
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Company Law Reform
Companies’ registers of members are also on the public record as their Annual
Return to Companies House must include either the current register or, if a
register has been returned in one of the 2 preceding years, the changes to it
since the last return. The CLR recommended that for public companies this
requirement should be reduced to details of only those members with
significant holdings: this will be implemented through the existing power to
make Regulations changing the content of the Annual Return.
Information about past members is of great importance to the people concerned.
Therefore the register of members will continue to be prima facie evidence of
the information it contains. At present, companies have statutory immunity
from claims relating to entries after 20 years; the CLR recommended this
period be reduced. The Bill will provide that the period be 10 years in keeping
with the Law Commissions recommendation on the statute of limitation.
It also makes the same reduction to the period for which companies are
required to keep past members’ details, while making clear that this old
information may be kept separate from information on current members.
4.8 Capital maintenance and share provisions
Companies limited by shares have traditionally been seen as a mechanism by
which the owners of such companies ( the shareholders) limit how much of
their money is at risk ( generally speaking, if a company is insolvent and unable
to pay its debts the creditors have no claim against the shareholders). But a
company is also a way of protecting creditors and the rights of minority
shareholders, in so far as money paid into the company by its shareholders
( the company’s capital) belongs to the company and can only be paid back to
the shareholders in certain circumstances. This makes life easier for creditors
( and shareholders who do not have a controlling interest in the company). The
rules that give effect to these general principles are sometimes referred to as
the capital maintenance rules.
Whilst it is obviously important to protect the interests of a company’s
creditors, the current provisions give rise to some of the most complex and
technically challenging provisions of the current Act – 94 sections of detailed
rules in total. These are capable of catching a number of potentially beneficial
or at least innocuous transactions and as a result companies, and their
advisors, can spend disproportionate amounts of time and money ensuring
that they do not inadvertently fall foul of the rules.
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4 Ensuring better regulation and a “ Think Small First” approach
Deregulation for private companies
Capital maintenance is largely irrelevant to the vast majority of private
companies and their creditors. This is recognised by the current Act, which
carves out a number of exceptions to the capital maintenance rules for private
companies only. However because the provisions which are of most interest to
private companies are drafted as exceptions, private companies have first to
understand all of the rules and then identify that an exception applies to them,
and if so how it works. Moreover the exceptions, while useful, do not simplify
the law as much as is possible.
The Bill will therefore introduce a number of deregulatory measures targeting
requirements that now appear unnecessary and burdensome for private
companies.
Abolition of financial assistance provisions for private companies
The provisions on financial assistance are designed to protect creditors and
shareholders against the misuse and depletion of a company’s assets. The CLR
concluded that it was inappropriate for private companies to continue to carry
the cost of complying with the rules on financial assistance as abusive
transactions could be controlled in other ways, e. g. through the provisions on
directors duties which will be included in the Bill, or through the wrongful
trading and market abuse provisions that have come into force since the
Companies Act 1985. Private companies will therefore no longer be prevented
from providing financial assistance for the purchase of their own shares.
Capital reductions by private companies
The current Act provides a means by which both private and public companies
limited by shares may reduce their share capital ( which includes share
premium and any capital redemption reserve). The procedure can be time
consuming and expensive as it involves confirmation by the court.
The Bill will introduce a new and simpler mechanism for capital reductions for
private companies. This will be available as an alternative to the current court
approval procedure. The new procedure will require a special resolution of the
company’s members, based on a solvency statement made by the directors.
The solvency statement will require the directors to confirm that the company
is solvent and will be able to pay its debts at all times within a year of the
capital reduction. It will be a criminal offence for a director to make a solvency
statement without having reasonable grounds for the opinion expressed in it.
The introduction of the solvency statement procedure for capital reductions
will render the private company rules on the purchase of the company’s own
shares out of capital redundant. The Bill will repeal these rules.
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Company Law Reform
The CLR had proposed that the solvency statement procedure for capital
reductions should equally be available for public companies, but the response
to this proposal in the 2002 White Paper was mixed. Whilst many respondents
were in favour of simplifying the procedure for capital reductions, concern was
expressed that the proposed additional safeguards built into the procedure for
public companies – to meet unavoidable EU requirements – meant that few
public companies would use the solvency statement procedure in practice. The
Government therefore does not propose to introduce this change at present for
public companies.
Distributions and intra- group transfers of assets
So as to protect the interests of the creditors of a company, company law
contains restrictions on when companies can pay dividends. The current Act
lays down technical rules which determine what is a lawful distribution by a
company to its members. These statutory provisions operate alongside the
common law which is expressly retained and which remains an essential
component in the regulation of improper distributions.
The 1989 decision in the case of Aveling Barford v. Perion Ltd ( which was
decided by reference to common law rules on distributions and maintenance
of capital rather than the statutory rules) is widely considered to have cast
doubt on the validity of intra- group asset transfers conducted by reference to
book value rather than by reference to market value. It is understood that such
transactions are often carried out by reference to book value rather than
market value for a variety of business, administrative or tax reasons. The Bill
will make clear that where the transferring company has distributable profits,
its assets can be transferred at book value. This will remove any uncertainty
about the current law, and also avoid the need for companies to carry out
complex asset revaluations requiring significant professional advice and fees
to advisors.
Application of share premium account
Amounts transferred to the share premium account where shares are issued at
a premium ( i. e. for an amount more than the shares’ nominal value) can only
be used in specific, limited circumstances. In line with the CLR’s
recommendations, the Bill will provide that the share premium account can no
longer be used to write off a company’s preliminary expenses ( i. e. on
formation).
Further capital maintenance reform
The Government believes that it would be beneficial to introduce greater
flexibility into the capital maintenance regime for public companies. However,
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4 Ensuring better regulation and a “ Think Small First” approach
in advance of significant amendments to the EU legislation it would not be
possible to make major changes to our capital maintenance regime in respect
of public companies at this stage. Thus, for example, the financial assistance
rules will continue to apply to public companies. While the CLR recommended
a number of further technical changes to these rules, the Government is
seeking to give priority to the CLR’s overarching recommendation for
fundamental reform of the capital maintenance regime through reform of the
2nd Company Law Directive. The Government very much welcomes the
proposals in the Company Law Action Plan for a review of the 2nd Directive
and is committed to working with the Commission and other Member States to
take this forward as rapidly as possible. The proposed company law reform
powers will provide a mechanism for effecting reform for all classes of British
company as and when appropriate.
Miscellaneous provisions on shares
At the moment all companies with shares are required to have a limit on the
maximum amount of shares they can allot– called the authorised share capital.
This limit can be raised with shareholder agreement. In practice it is normally
set at a level that is much higher than it is anticipated the company will need.
This means that authorised share capital normally serves no useful purpose.
As recommended by the CLR, the Government proposes to remove the
requirement on the basis that it is an unnecessary piece of regulation. It will
of course continue to be possible for shareholders to include provisions with
a similar effect in a company’s articles if the special circumstances of that
company make such restrictions important to the shareholders.
Linked to this, for private companies, will be the removal of the requirement
for shareholder approval of allotments of shares ( except where the company
has or will, as a result of the allotment, have more than one class of shares);
and the removal of the requirement for authorisation in the articles to issue
redeemable shares.
Both public and private companies will be free to issue redeemable shares
without the need to specify the terms and manner of redemption of those
shares in their articles. Shareholders will therefore be able to approve an
allotment of redeemable shares on terms that the directors determine. The
terms and manner of redemption will need to be provided to the Registrar of
Companies in the return of allotments. This return will in future contain a
statement of the company’s total allotted share capital.
The Bill will permit the direct issue of warrants to bearer in respect of fully
paid shares ( that is, there will be no need for the shares to first be issued in
registered form and then converted to bearer form).
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Company Law Reform
Trustees in bankruptcy and personal representatives of deceased members
will have the right to be registered as a shareholder notwithstanding any
contrary provision in the articles. In addition, where a company has refused to
register the transfer of a share, the directors must provide the transferee with
such information about the reasons for the refusal as the transferee may
reasonably request.
Redenomination of share capital
At the moment a company may issue new shares in any denomination it wants
( e. g. euros, dollars, sterling or other). What it cannot do is convert its existing
share capital into another currency without cancelling or buying back its
existing shares ( the shares it wants to redenominate) and issuing a fresh batch
of shares in another currency.
This is cumbersome and unnecessary and we are introducing a simplified
procedure to enable companies, if they wish, to easily convert their share
capital from one currency to another, and to renominalise their shares, after
conversion, to achieve round share values ( i. e. avoid having shares with a
value expressed in fractions of a currency after conversion).
Notice period for pre- emption rights
In line with the CLR’s recommendations on pre- emption rights, and as
supported by Paul Myner’s recent review of pre- emption rights, the present
statutory minimum period of 21 days for acceptance of rights offers will be
retained, but we will take a power, in the Bill, to vary this period ( upwards as
well as down but to no less than 14 days). This power will require an
affirmative resolution of both Houses of Parliament.
4.9 Companies House
A number of changes will be made to ensure that the system for companies to
file information with Companies House is kept efficient and business- friendly.
Many of these will focus on encouraging and exploiting new forms of
e- communication, and the Registrar ( i. e. Companies House) will have greater
powers to specify the form and manner in which companies must submit
information.
There will also be measures to help ensure the accuracy and timeliness of
information on the public register. These will include:
• the law will state with greater clarity what information will appear on the
register, and what will not;
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4 Ensuring better regulation and a “ Think Small First” approach
• the ability for Companies House simply to telephone companies who have
provided incomplete information, so that they can easily obtain the missing
element without having formally to reject the incoming form;
• the ability to remove items from the public register which have been
erroneously placed there or which are “ surplus” and unnecessary;
• where information has been properly placed on the register, but
subsequently proves to be inaccurate or misleading, there will be a new and
simple court- based procedure for ensuring that it can be removed.
These measures will be coupled with a new offence, making it unlawful
knowingly or recklessly to deliver to the Registrar material which is misleading,
false or deceptive in a material particular.
Company strike- off and restoration
At present, only private companies are able to request voluntary strike- off from
the register. This will be extended to public companies.
Other measures will make it easier to restore companies to the register where
they should not in fact have been removed. Companies House will be able to
do this by administrative means ( in more straightforward cases), and
simplifications will be introduced to current statutory court procedures to cater
for other cases.
4.10 Reports and accounts
The Government’s plans for a modernised company reporting and accounting
system include a number of important changes which have already been
effected. These include the raising of the audit thresholds for turnover and
balance sheet totals to £ 5.6m and £ 2.8m respectively, taking some 69,000
companies out of the requirement to have accounts professionally audited; and
the introduction of the OFR for all quoted companies, a key plank in promoting
more effective dialogue between companies and investors and helping to
maintain trust and confidence in capital markets.
Simplification of Part 7
The accounting, auditing and reporting sections of the current law ( Part 7 of
the Companies Act) are amongst the most relevant of all provisions in that Act
to companies in the normal course of their business. A number of consultees,
particularly smaller firms and their advisors, have said that it is hard for them
to find and understand the requirements which relate to them because in the
interests of brevity the approach has been to express some provisions as
modifications of those which apply to larger companies.
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Company Law Reform
The Government has therefore looked very carefully at possible ways in which
the provisions could be restated in a more coherent way, making it clearer to
users which provisions affect which categories of company. One approach is to
set out sequentially a separate, comprehensive “ code” for each of the different
sizes of company, starting with small, private companies, which can be read
independently. The indicative clauses published in this document are drafted
on this basis. However, this approach has disadvantages in terms of length and
there may be some scope for setting out separately the limited number of
provisions that are common to companies of whatever size.
Time limits
The bill reduces the time limit for private companies to file their annual
reporting documents at Companies House after the year end from 10 months
to 7 months and for public companies from 7 months to 6 months. These
changes, recommended by the CLR following external consultation, reflect
improvements in technology and the increased rate at which information
becomes out of date, as well as filing times in other countries which tend to be
less generous than in the UK.
Abbreviated accounts
Small and medium sized companies can currently file abbreviated accounts at
Companies House. This enables them to keep some information confidential
( for example on profit margins). The CLR recommended that the option be
abolished in the interests of greater transparency and that instead companies
should file their full statutory accounts. Consultation showed that there were
both proponents and opponents of abolition of this option. The Government
has decided that the option, which is currently popular with a great many
companies, should be retained, but that both small and medium sized
companies should be required to disclose the amount of turnover for the
relevant financial year.
Disclosures in the directors’ report
It was a recommendation of the CLR that once the OFR was in place the DTI
should consider what current directors’ report requirements remained
necessary, both for companies required to produce OFRs and for others, and
remove those that were no longer required. The Government agrees that it is
in the interests of more effective company reporting to remove ineffective or
otiose disclosure requirements, whilst maintaining any requirements for which
there is a clear public policy interest.
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4 Ensuring better regulation and a “ Think Small First” approach
Following review on this basis, its proposed to remove requirements for
disclosures in respect of the employment of disabled persons, and employee
involvement. The requirement for companies with over 250 employees to state
their policy on the employment of disabled persons has been completely
overtaken by substantive requirements under the Disability Discrimination Act.
Retention of the requirement is effectively doing no more than asking
companies to state that they are complying with the law, and is therefore
uninformative. The requirement for companies with over 250 employees to
state action taken to inform and consult employees has been overtaken by
more substantive requirements under the European Works Council Directive
and, from March 2005, the Information and Consultation Directive.
It is also proposed to amend, but not remove entirely, the requirement to
disclose political and charitable donations. Companies of all sizes are required
to make a disclosure relating to political donations and charitable donations if
aggregate donations in either case exceed £ 200. In the case of political
donations, the recipient must be named and the total amount given to that
recipient disclosed; and prior shareholder authorisation is required for
donations which in aggregate exceed £ 5,000 in the course of the year. It has
long been recognised that a director may face a conflict of interest when the
company makes a political or charitable donation, and it would be wrong to
remove this important disclosure requirement entirely. However, the £ 200
threshold for disclosure now appears very low, and it is proposed to raise it in
both cases to £ 2,000.
Disclosure of criminal convictions
The CLR also suggested that companies should in addition be required to
disclose any criminal convictions in their annual report and accounts, and the
2002 White Paper discussed options for implementing this underlying idea.
Responses to the White Paper on this point were divided, with little evidence
provided that publicising convictions ( beyond what already happens in, for
example, the local press) would encourage compliance. Proposed options
appeared to be either very difficult to enforce ( if the law were to require
directors to admit guilt in their published report and accounts) or
disproportionately expensive ( if, say, Companies House were to be required
to maintain a web- based register, as mooted in the 2002 White Paper). The
Government therefore does not propose to proceed with this suggestion.
4.11 Public/ private split
The Government wishes to ensure that a private company ( defined as any
company that is not a public company):
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Company Law Reform
• is prohibited from offering its shares or debentures to the public, or
colluding in any such offer made by another person; and
• is required to re- register as a public company if it does anything that
facilitates the transfer of its shares or debentures, by any person, to persons
other than those to whom the company, as a private company, would be
allowed by law to offer such securities.
The first of the limbs set out above is not novel. Section 81 of the Companies
Act 1985 currently prohibits private companies from offering their shares and
debentures to the public. However, the second limb will be new, and will be
enforceable by a power for various persons ( including the Secretary of State)
to apply to the court for an order that the company must re- register as a public
company.
These proposals will take forward, so far as is feasible, the CLR
recommendations that:
• company law should continue to prohibit private companies from offering
their shares to the public;
• the meaning of offer to the public for the purposes of that prohibition ( and
in particular the related exemptions) should be aligned as far as possible
with the exemptions which apply in relation to an offer to the public for the
purposes of securities regulation; and
• private companies should be prohibited from admitting their shares to
trading on a prescribed investment exchange, or from assisting in any way
an application for admission of their shares to trading made by any other
person.
4.12 Jurisdictional migration
The Government’s proposals regarding jurisdictional migration encompass two
conceptually distinct provisions:
• to enable a company registered in Great Britain to transfer its registered
office between England and Wales, and Scotland;
• to enable:
i) a company registered in Great Britain either to migrate to a jurisdiction
other than Great Britain ( including another EEA State, or a third
country); and
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( ii) a company formed under the law of a jurisdiction other than Great
Britain to migrate to Great Britain
without, in either case, forming a new company in the ‘ incoming’
jurisdiction.
Since the publication of the CLR’s Final Report, the European Commission has
consulted on outline proposals for a company law directive on the cross-border
transfer of the registered office of a limited company. A formal proposal
for such a Directive is expected shortly from the Commission.
The provisions of the directive would, of course, supersede the CLR
recommendations in respect of the migration of companies between England,
Wales and Scotland and other EEA States. The CLR recognised this in their
report, and, in line with spirit of their thinking, the Government does not
propose to pre- judge the outcome of the EU negotiations by seeking express
provision at this stage enabling migration between Great Britain and other
EEA States.
The Government would envisage exploring the possibility of using regulations
to implement the directive and to extend the directive regime, insofar as its
further intention is that the Bill should contain a power for the Secretary of
State to make the necessary provision for migration between Great Britain and
non- EEA jurisdictions. It also wishes to make provision, by secondary
legislation, to enable companies registered in Great Britain to transfer their
registered office between England and Wales, and Scotland.
4.13 Overseas Companies
Changes will be made to the current framework in respect of overseas
companies, in line with the substance of the recommendations of the CLR.
Under the current Act, there are in effect two parallel regimes, one applying
where a company is incorporated outside the UK and Gibraltar, but has set up
a branch in Great Britain; the other where a company is incorporated outside
GB and establishes a place of business in GB. The Bill will enable a single
regime to apply to all overseas companies, i. e. all companies which are
incorporated outside GB and which establish a place of business in GB. This
regime will, as the CLR recommended, be based on the requirements of the
11th Directive, in other words it will generally reflect the existing provisions
applying to non- UK companies setting up branches in GB.
The provisions relating to overseas companies appear a good candidate for
removal from primary legislation and placing into subordinate legislation
because of their relatively self- contained nature, and because it seems largely
possible to ensure that all necessary provisions can be set out in one place.
4.14 Arrangements and reconstructions
The Bill will make a number of generally technical changes, generally in line
with CLR recommendations, to ensure that, on application by the company or
other proposer of the scheme, the courts will be able to determine what
constitutes a “ class” of creditors or members; and to ensure that, even where
a class is wrongly constituted, court approval should stand where the court is
satisfied there was no effect on the outcome. The courts will also be able, on
request, to direct the manner in which meetings should be called, held and
conducted.
The CLR had suggested that there might be a case for the introduction of a
non- court based statutory merger procedure. However, in the light of the other
changes being made as noted above, and in the absence of any clear business
demand emerging from previous rounds of consultation, the Government does
not propose to take these ideas forward.
4.15 Authorisation of political donations
The Political Parties, Elections and Referendums Act 2000, which implemented
the Committee on Standards in Public Life’s recommendations on the funding
of political parties in the UK, introduced a requirement for prior shareholder
authorisation of political donations by companies above an annual threshold of
£ 5,000. This recent reform appears to have been widely supported, and no
substantive changes are proposed. However, certain technical changes are
proposed to the current requirements in order to remove unnecessary burdens
and make them more business friendly. These are:
• to make it clear that certain non- contentious “ donations” ( e. g. paid time- off
for elected local councillors, or the provision of a meeting room for trade
union officials) are not caught by the requirement for shareholder approval;
and
• to allow companies greater procedural freedom in obtaining the necessary
shareholder authorisation, in particular by permitting them to seek separate
authorisation for donations to political parties and donations to other
political organisations.
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4 Ensuring better regulation and a “ Think Small First” approach
In addition, as noted in 4.10, the threshold for disclosure of political donations
will be raised to £ 2,000.
4.16 Company charges
Many companies use their assets as security for loans. The Companies Act
provides that these transactions are invalid in the event of the company’s
insolvency unless they have been properly registered. Under the Act, the
system of registration is based on transactions that have already been
completed. The CLR consulted over changes to improve the present system;
they also sought views on whether it should be replaced with a different system.
Following this consultation, the CLR were concerned lest the provision that a
charge is invalid if not registered ( i. e. the sanction of invalidity) contravened
the European Convention on Human Rights. This sanction underpins the
present system. As about half of their respondents had favoured developing a
system of notice- filing, they recommended that the Law Commissions be
asked to make recommendations for reform to both company law and security
over property other than land in both England and Wales and in Scotland.
Because of the fundamental differences between Scots law and English law
with regard to the law of property and of rights in security, the Government
made separate requests to the two Commissions.
In its Report on Registration of Rights in Security by Companies ( Scot Law
Com No 197) the Scottish Law Commission recommended that the validity of
rights in security granted by companies should cease to be dependent on
particulars of the right in security having been registered in the Register of
Charges at Companies House. As respects floating charges in Scotland, the
principal recommendation of the Scottish Law Commission was that
registration of the floating charge in a new Register of Floating Charges, to be
kept by the Keeper of the Registers of Scotland, should be the means whereby
the floating charge would be created or constituted, with priority being
dependent on the date of registration. The Scottish Law Commission also
suggested that the annual return submitted by a company should contain short
details of outstanding rights in security granted by the company and that, on
payment of a prescribed fee being made to it by an inquirer, a company should
be under a statutory duty to meet a request for the same details respecting any
rights in security granted since the date of the last annual return. The current
requirement to maintain a register of charges at the company’s registered
office would cease. These recommendations span both matters devolved to
the Scottish Executive and also those reserved to Westminster.
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The Law Commission for England and Wales, which was asked to carry out a
more fundamental review ( including the kinds of transaction that should be
registered and the rules that govern priority), has consulted extensively over
fundamental changes. The balance of informed opinion shifted considerably
during this process. Therefore the Commission has not yet made its
recommendations.
The Government is considering with interest the recommendations of the
Scottish Law Commission, noting that those relating to devolved matters are
for the Scottish Executive. It looks forward to receiving the recommendations
of the Law Commission for England and Wales.
4.17 Transparency Directive
Transparency Directive Implementation
The Transparency Directive1 is an important part of the Financial Services
Action Plan. The Financial Services Action Plan has been the European
legislative framework for developing the Single Market in financial services.
The purpose of the Transparency Directive is to enhance transparency in EU
capital markets. It does this by establishing rules on periodic financial reports
and disclosure of major shareholdings for issuers whose securities are
admitted to trading on a regulated market in the EU. The Directive completed
the European legislative process on 15 December 2004 and must be implemented
into national law by all Member States no later than 20 January 2007.
Most of the requirements of the Transparency Directive can be implemented by
secondary legislation using powers under Section 2( 2) of the European
Communities Act 1972. The Treasury will consult on proposed regulations to
be made under the European Communities Act in due course. However, the
proposed approach for those parts of the Transparency Directive relating to the
disclosure of shareholdings – historically part of company law – requires
primary legislation. The Government therefore proposes to include the
necessary provisions in the Bill.
Disclosure of shareholdings
The Directive requires Member States to impose obligations on:
• issuers of securities, which are traded on a regulated market in the Member
State, to disclose certain information; and
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1 Directive 2004/ 109/ EC of the European Parliament and of the Council of 15 December 2004.
• shareholders, and certain parties able to exercise control of voting rights, to
disclose certain information to the issuer of the shares in question.
Member States also have to appoint a competent authority to supervise these
obligations. In the UK this will be the Financial Services Authority ( FSA). For
the majority of the Directive’s provisions, the FSA already has sufficient powers
under the Financial Services and Markets Act 2000 ( FSMA) to permit
implementation by way of regulations made under the European Communities
Act 1972. However, the FSA currently has no powers under FSMA to make
rules in respect of disclosure of shareholdings and hence the requirement for
primary legislation to implement the Directive’s provisions in this area.
The existing requirements for shareholders to disclose substantial
shareholdings are set out in Part 6 of the Companies Act 1985. In order to
bring together supervision of all Transparency Directive obligations under one
competent authority, the Government proposes to transfer this responsibility
to the FSA. Part 6 of the Companies Act 1985 will be repealed in so far as it
relates to a shareholder’s continuing disclosure obligations.
Scope of the new FSA disclosure regime
In relation to mandatory disclosure of interests in shares, the Bill will establish
the scope of the new disclosure regime and give the FSA powers to make rules
with regard to shareholder notification. Before the FSA can make rules, it must,
under the provisions of FSMA, undertake extensive consultation with
stakeholders and publish a cost- benefit analysis of its proposals for public
comment.
It is proposed that the scope of the FSA regime would be broadly similar to the
scope of the regime under Part 6 of the Companies Act 1985, which imposes
disclosure obligations in relation to an “ interest in shares”. However, in order
to reduce burdens, the Government is proposing to make a number of
deregulatory changes to the current disclosure regime.
• Basis of disclosure obligation. The obligation of disclosure under Part 6 of
the Companies Act 1985 relates to “ interests in shares”. The obligation of
disclosure under the Directive relates to “ major holdings in issuers”. In
broad terms, this is best understood as a holding of voting rights. The
holding of voting rights is currently only one of the “ interests in shares”
whose acq