COMPANY LAW REVIEW: For a new age, a new type of business law

In a few years’ time (parliamentary timetable and the British electorate willing) the UK should be the proud possessor of the most modern corporate legislative framework in the world. The crunch point is fast approaching in a process that started in 1998 and will probably end in 2003 or 2004. At the end of it, there should be a legal environment that will help every type of business – from the small company to the mega-corporation – to get on with the business of wealth creation.

Nick MacAndrew, an executive director at investment bank and asset management firm Schroders, has been on one of the myriad working parties that have formed the backbone of the Company Law Review (CLR). He also represents the interests of the Hundred Group of Finance Directors, and his reaction to the review process so far is simple. ‘The drift is pretty good,’ he says.

The work of the CLR has so far mostly bloomed unseen. But the likes of MacAndrew and others – such as Roger Davis of PricewaterhouseCoopers, who has also committed much time to the project – are urging FDs and business people in general to take notice as the June and July deadlines for responses approach (see box, page 40).

Part of the reason FDs seem so little exercised over the review is that many believe company law and regulation are okay as they are. One financial controller who works for a European software company told Financial Director: ‘From a personal point of view, it is hard to see what is wrong with the systems that are in place already – it’s fairly straightforward to set up a business, although there may be some need to change the law to deal with e-commerce and copyright issues.’

Those involved in the CLR would disagree with such a view. Danielle Stewart runs a growing accountancy firm in West London and has been involved with the Company Law Review, mostly on the small companies reforms. ‘There are all sorts of deregulatory proposals, all of which should help create a competitive economy,’ she says. ‘The end result will be a more instinctive, intuitive Companies Act that will more closely reflect the way people do business.’

Although much of the work of the CLR has been thorough and comprehensive, there has been some confusion and a few spats along the way – mostly since Stephen Byers took over the reins at the DTI. Firstly, some say that under orders from the Number Ten spin machine that he should be seen to be cutting red tape at a time when the minimum wage was being introduced, Byers announced he was minded to raise the turnover level for a statutory audit to £4.8m – the maximum permitted under European Union law. Eventually, he announced in May 2000 that the threshold would be raised to £1m this summer and probably £4.8m later, depending on the outcome of the CLR.

Byers also seemed to be jumping the gun over corporate governance in the wake of the debacle over Barclays Bank’s decision to give directors large pay rises at the same time as announcing a programme of branch closures and the introduction of charges for using cash machines. The DTI told the press that all publicly quoted companies would be required to ask shareholders to vote on the salaries paid to their board members each year. Whatever you think about such a move – which was backed by the National Association of Pension Funds and the Association of British Insurers – from the CLR perspective it is interesting to note that this ‘fat cat’ pay vote is not being introduced by primary legislation but instead will be written into the Combined Code of Practice.

This raises one of the key philosophical debates which has swirled around during the course of the CLR – namely to what extent the rules should be written in primary legislation and to what degree the details should be left to devolved legislative powers such as the Combined Code. One of the major players in the CLR told Financial Director: ‘My unofficial view is that you should give as much power as possible to bodies such as the Financial Reporting Council (FRC) – and if necessary beef up the resources which they have at their disposal – and keep company law to the absolute basics.’ Those who feel that Parliamentary scrutiny is critical to the workings of a democratic society will inevitably have rather different feelings.

Whatever the niceties of law-making, most FDs will probably be more concerned about what the law will mean for them and their companies. The main themes emerged in the Spring in the consultation document Modern company law for a competitive economy: developing the framework. According to Bryan Sanderson, the managing director of BP Amoco and the steering group’s spokesman: ‘The document sets out two main themes: an improved and modernised framework for all companies, with significant proposals for re-shaping the rules which govern the way large companies in particular are operated and controlled; and a simplification and restructuring of the law for small companies reflecting the review’s commitment to ‘think small first’.’

Sanderson added: ‘We need a system of company law which meets the needs of business, and encourages enterprise and competitiveness in companies large and small. It must be flexible, clear and accessible. Our aim has been to strip out obsolete provisions and to simplify and clarify, as well as to improve transparency and accountability and to recognise the wide range of relationships and know-how on which success depends.’

At the heart of the proposals is a statutory statement of the duties of company directors and a list of improvements in company reporting. Although the steering group backed off the idea of making directors legally responsible to company stakeholders, the proposed statement of directors’ duties requires directors to act in the collective best interests of shareholders and recognises that this can only be achieved by their having due regard for interests such as those of employees, customers, suppliers and the community. It says directors should take into account the impact of business decisions on the company’s reputation and on the environment. The statement also recognises the need for directors to take account of long-term as well as short-term consequences of decisions.

The clarification of directors’ duties is underpinned by the increased transparency provided in company reporting. Particularly for large companies, the proposals would require publication of more timely and comprehensive information. Public and very large private companies would be expected to publish a broad operating and financial review (OFR), which would explain company performance, strategy and relationships.

Commenting on the idea of putting more emphasis on companies’ preliminary announcements, Tony Wedgwood, technical partner at KPMG, wondered whether it would improve communication. He said: ‘We haven’t cracked the issue of information overload. It is a fact of life that big organisations have a lot to say. There have been some prelims which have been longer than the statutory set of accounts.’

Under the current proposals, life would change for privately-owned companies as much as for quoted ones. The consultation documents have a whole shopping list for simplifying the law for private companies, including shortening minimum notice periods for meetings, allowing companies to relax the requirements for resolutions in writing, simplifying the capital maintenance rules, relaxing the restrictions on the powers of directors to issue shares, removing the requirement to have a company secretary, making provision for arbitration of shareholder disputes and revising the model constitution – the so-called table A.

To this would be added a regime designed specifically for small companies, which would be the automatic default setting. This would be based on the existing ‘elective’ regime which enables private companies to opt out of certain requirements – for example, holding annual general meetings and filing full accounts – but requires a specific decision to do so. There could even be a regime for further relaxations for owner-managed companies where the shareholders and the directors are one and the same.

If these changes go ahead there will be consequences for virtually every aspect of corporate life, from the level at which audit thresholds are required, through the requirement to follow accounting standards in preparing company accounts (as opposed to the present requirement to show a true and fair view), and on into alterations to the roles of bodies such as the Accounting Standards Board, the Auditing Practices Board and the Financial Services Authority.

Inevitably, such a comprehensive review has received a mixed press. Roger Davis of PwC welcomes the ‘once-in-a-lifetime opportunity to determine future company regulation while encouraging enterprise’. And he adds: ‘A director’s legal responsibility to everyone would be a practical responsibility to no-one. Shareholder value should remain king, but it needs a consort of accounting for corporate value to society. I believe the paper sets the right future climate for corporate plcs to operate.’

Both Davis and MacAndrew emphasise that the proposals should help the UK’s position as a major financial and business centre. MacAndrew says: ‘The proposals are not too prescriptive. They leave the necessary flexibility to take account of the fast-changing environment. At the same time, it is important to recognise the impact of earlier communications to shareholders. I also like to think they are taking account of London’s position as a financial centre. We must remain internationally competitive.’

Not everyone is so keen. John Davies, head of business law at the Association of Chartered Certified Accountants, is worried by the way in which the independence of the CLR has been undermined by ministerial interference, especially on the audit question. ‘You could argue that the steering group has not lived up to its motto of ‘think small first’,’ he claims. ‘For instance, there will be no difference in the responsibility of directors whatever the size of the company they act for.’ Davies also suggests that there has been no serious attempt to find alternative corporate vehicles for smaller organisations, apart from the limited liability company.

Nevertheless, however much people criticise, it is a reasonably safe bet that when the final proposals are published they won’t differ much from the consultation paper. What happens then probably depends on how the British electorate votes in the next general election. If Labour gets a second term, then the Company Law Review seems almost certain to hit the statute books. But if there is a shock result then it may well be an early casualty of the incoming government.

Rough guide to the review

1. Why is the government conducting a Company Law Review?

Company law lies at the heart of the economy. Although technical, it provides the legal basis for all companies and is fundamental to national competitiveness.

2. So why change it?

The current framework of company law is essentially constructed on foundations which were put in place by the Victorians in the middle of the 19th century. There have been numerous additions and amendments since then, which have created a patchwork of regulation that is immensely complex and also seriously out of date. The resulting costs and problems may not be obvious, but they are real and substantial nonetheless.

3. What’s the story so far?

The timetable of events has been:

March 1998 – a consultation paper outlined the scope, arrangements and terms of reference of the review.

February 1999 – the review steering group published its first consultation document The Strategic Framework, which identified the issues it would address. Two academic papers were then commissioned. They were: International Survey of Company Law and Company law in Europe: Recent Developments.

October 1999 – the steering group issued consultation documents, which built on the work carried out up until then. These proposed changes in three key areas:

company formation and capital maintenance;

reformation of the law concerning overseas companies;

company general meetings and shareholder communication.

March 2000 – the steering group issued its second strategic consultation document, called Developing the Framework. This covered key areas of corporate governance and looked at the regulations for small and private companies.

All the papers referred to can be accessed on www.dti.gov.uk/cld/review.htm

4. And what happens next?

The Review Steering Group has asked for responses on the key March 2000 document by the middle of this month (15 June) for small companies, and 28 July for large company governance issues – a timetable condemned as too tight by many. In due course, there will be a final report to ministers (probably in Spring 2001). Return to the Financial Director website