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Company Law Reform: To Be or Note to Be?

July 2005

Now that the consultation period for the latest DTI White Paper on company law reform has come to a close, we examine the impact the proposed Company Law Reform Bill would have on private companies and consider whether the Bill, in its current form, will finally see the light of day.

The Queen’s speech delivered to the House of Commons in May rekindled hope that company law reform, which has been proposed since the Company Law Review of 1998-2001, is back on the Government’s agenda. Although the Company Law Reform Bill was not mentioned by name, it was indicated that “company law will be reformed to encourage greater levels of investment and enterprise”. In fact, the Government aims to introduce significant changes to the law governing the constitution, management and administration of companies; measures which it believes will simplify the operation of UK businesses, producing costs savings of up to £250 million per year.

Key Proposed Changes for Private Companies

The draft clauses of the Company Law Reform Bill, published separately by the DTI, look to materially rewrite existing company law. The table on the following page sets out the main potential changes for private companies, grouped by subject matter.

Timetable for Implementation

Those eager to implement the new reforms and streamline the administration of their business are advised, however, to exercise caution. Not only may there be changes to the Government’s proposals following the latest round of consultation, but the draft clauses of the Company Law Reform Bill themselves are destined for amendment to incorporate additional recommendations proposed by the White Paper. Indeed, a number of clauses specifically provide that certain suggested amendments to the current law will only be clarified and imposed by way of a special form of secondary legislation (which will need to pass through both Houses of Parliament).

The Company Law Reform Bill was just one of the many proposed pieces of legislation sidelined by the close of Parliament prior to the election earlier in the year. Even the sub-set of bills relating to trade and industry contains matters higher on the Government and public agenda, which one may expect to be dealt with first (for example, the Corporate Manslaughter Bill, the Regulatory Reform Bill and the CrossRail Bill).

In addition, many of the proposed reforms have been suggested by previous committees tasked with simplifying corporate administration but have never become law. Commentators have likened the experience of reviewing the latest round of proposals to that of the torment of Tantalus: being able to see the desired product but forever finding it just out of reach. They may be heartened by the recent appointment of Alun Michael MP as Minister for Industry and the Regions, whose remit includes responsibility for the Company Law Reform Bill. With the Crime and Disorder Act 1998 and the recent Hunting Act to his name, he has a clear pedigree of pushing through difficult or prolonged legislation.

Coupled with this is the fact that in wishing to incorporate provisions in the Company Law Reform Bill which implement the EU Takeover Directive, the legislation appears to have a self imposed deadline for adoption. Member states are required to implement the Takeover Directive by 20 May 2006 . Whilst these specific provisions could find themselves being adopted in isolation next year if the Company Law Reform Bill has not been finalised in its entirety, it does make a positive statement that, despite a lengthy gestation period, the birth of the Company Law Reform Bill may at last be a foreseeable reality. Although it may be premature to break open the champagne to wet the baby’s head, now could be the time to put it on ice

Key Proposed Reforms Affecting Private Companies

Company Formation

Companies may be formed by a single person.

Articles of association become the sole constitutional documents of the company (memoranda merely confirm the subscribers’ agreement to form the company and be members).

New Model Articles replace Table A (containing the minimum number of necessary clauses; for example, they do not provide for governance of general meetings).

Each director may provide a service address for the public record (home addresses will be kept on a separate restricted-access record).

Establishes a framework for jurisdictional migration of registered offices worldwide.

Facilitates the move towards dematerialised securities market by allowing companies not to issue paper share certificates.

Directors & Company Secretary

General duties of directors are placed on a statutory footing.

Essential goal of directors will be the success of the company for the benefit of the members as a whole, taking a balanced view of the long-term implications and having regard to interests of those in the company and the wider community.

Loans, quasi-loans, credit transactions, property transaction etc can be made for the benefit of directors with shareholder approval.

In certain circumstances, conflicts of interest may be authorised by the board.

Corporate directors are still permitted, but at least one director must be a natural person.

Restriction on directors over 70 is removed; minimum age of 16 imposed.

No longer a requirement for a company to have a company secretary.

Provisions on offences for breaches of company law to target directors and officers in more cases, rather than the company.

Resolutions & Meetings

Written resolutions may be passed with 50% (ordinary) or 75% (special) majority. Extraordinary and elective resolutions are abolished.

Private companies are no longer required to hold an AGM .

Minimum notice period for calling general meetings is reduced to 14 days in all cases.

Consent to short notice may be achieved by a majority in number holding 90% of shares.

Enabling beneficial holders of shares to receive information and exercise rights of registered owners, in certain circumstances.

Share Capital

Private companies are no longer prevented from providing financial assistance for a purchase of their own shares.

Removal of the requirement for an authorised share capital.

Reduction of share capital process made simpler (companies no longer need apply to the Courts).

Companies are able to re-denominate share capital.

Companies may transfer assets intra-group at book value (provided they have distributable profits).

Issuing redeemable shares is made simpler (companies no longer have to disclose terms and manner of redemption).

Electronic Communication

Companies are able to use e-mail or publish documents on a website as the default position for communicating with shareholders.

Auditors

Proportional liability for auditors (although shareholders are not allowed to agree amongst themselves to a predetermined monetary cap).

Increased transparency of audit and interaction with shareholders.

Useful web-links to more information:

www.dti.gov.uk/cld/review.htm - full text of the White Paper, draft clauses and commentary.