It has been a long time in gestation: the Company Law Reform Bill, which started its journey through Parliament on 1 November 2005, is a massive tome. It weighs in at a meaty 885 clauses with 15 Schedules and covers 509 pages.
The Bill was conceived as a grand idea – both an opportunity to throw away lots of old regulation that no longer makes sense in a modern economy and to restate Company Law in plain English to make it accessible to the average company director.
Like any good new book the Bill has arrived with a banner headline in the form of a “regulatory impact assessment” claiming that it will save UK business somewhere between £160 million and £340 million per year in direct costs.
Does it justify the hype or is it just much ado about nothing?
The Bill is the creature of a huge consultation process which started life in 1998 with great hopes. However, as with most significant attempts to reform company law the process ran into the problem that English law depends on precedent. Our law has grown up through myriads of judgments made in the course of actual cases relating to very specific points and very particular circumstances. As a result our legal system, unlike most European systems of law, does not adapt well to changes of statutory wording. Clever lawyers can have a field day arguing that what applied before does not necessarily apply now because the wording of the underlying law has changed.
That said, the parliamentary draftsmen have tried to do what they can and the result will be the biggest shake-up in Company law for at least 20 years. And for the first time ever the new law is intended to be UK wide, applying to England, Scotland, Wales and Northern Ireland.
The Bill contains a number of recent measures which have already been introduced – such as the requirement for listed companies to be more open about their future prospects when compiling their annual accounts by publishing an “operating and financial review.” It will also provide a vehicle to introduce some European legislation into our law including certain provisions of the EU Transparency Directive which affects declaring the size of shareholdings. But the principal focus is on the new domestic material the Bill introduces.
Pride of place must go to the codification of directors duties. For the first time an attempt has been made to set out in statute the duties of directors which, until now, have only been presented in a unified way in legal textbooks because they arise from a bewildering array of historical cases.
The big governmental PR promotion is that this code will create a statutory concept of “Enlightened Shareholder Value”. This is to be done by making clear that, while directors must promote the success of the company for the benefit of shareholders, this can only be achieved by taking due account of wider business factors (such as employees, the environment, business reputation, suppliers and customers) than simply focusing on immediate or short term shareholder gratification. There will now also be a statutory duty on directors not to accept benefits from third parties unless the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. The problem with the PR is that, while this is a new expression of the law, it is not new law!
What is new law, and may resolve a number of issues which arise, particularly in Management Buy Outs, is that boards may now specifically authorise directors to have conflicts of interest provided the director has not taken part in the decision. Where directors wish to buy their business from its current owners under the Bill they will no longer have to resign while making their plans and getting everything ready. This provision is a deliberate attempt to encourage entrepreneurial and business start-up activity by existing company directors.
Accountants may delight in the fact that the Bill expands the now widespread practice of limiting auditor liability. The Bill introduces a new “liability limitation agreement” for auditors which must be approved by shareholders each year. However the court can regard a limitation as ineffective to the extent it limits liability to an amount that is not fair and reasonable in all the circumstances. This provision looks like it will involve the courts in making commercial decisions as to what is fair, something the courts have long tried to avoid. Clearly the DTI is keen to avoid the collapse of another major audit firm.
The Bill is also being trumpeted as a major breakthrough for smaller companies. There are a number of measures intended to streamline the formation and administration of small companies. The most important of these is the long overdue abolition of the rules on “financial assistance” for private companies. Those rules mean that currently where someone is buying the shares of a private company, the company cannot make payments or grant security in connection with the purchase unless it jumps through a number of hoops involving statutory declarations and accountants reports. This has long been a thorn in the side of private company merger activity particularly where acquirers have to borrow to fund part of the price. This amendment will save money and time.
Will the Bill make a difference? Certainly lawyers and accountants will be spending considerable time familiarising themselves with its contents. However the Bill has been designed so that the average company does not have to “do” anything to comply. The real legal changes are intended mostly to be “opt in” rather than compulsory. I suspect most business people will not necessarily notice that much has changed. Whether the Bill justifies its significant cost savings tag will only become clear as time goes by.