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Bill must get act together

The company law reform bill (CLRB) will be the first comprehensive update of
the 1985 Companies Act (amended 1989). The CLRB will implement the majority of
recommendations in the Company Law review, which started work in 1998 and will
build on a companies bill white paper, published in 2002. Lawyers and business
groups believe that the Act will not contain many surprises.

The planned legislation repeals and replaces parts of the original Act and
introduces reforms in a number of areas, which will have an impact on directors,
auditors and shareholders of private, public and quoted companies.

The Department of Trade and Industry expects the bill to become law by “late
2006” with most of its provisions coming into force “not earlier than” April

Main objectives

The bill has been crafted with various objectives in mind:

• To bring companies legislation into line with current best practice;

• To introduce plain English into companies legislation;

• To reflect changes that have come into effect since the original Act, such
as electronic communications;

• To facilitate communication between companies and ‘indirect investors’,
whose names do not appear on a company’s share register;

• To ensure the UK remains an attractive place for companies to base
themselves and to transact their business.

The key proposals include:

• A statutory statement of directors’ general duties, which will codify
existing common law on directors’ duties, including their fiduciary duties.
Directors will also have a new duty to promote the success of the company.
Furthermore, at least one director must be a “natural” person. The proposals
also state that directors will have to be aged 16 or over and will no longer be
restricted to being under 70;

• Extended rights for shareholders to sue directors for negligence and other

• The ability for auditors to agree with companies to limit their liability
in respect of their audit;

• A new criminal offence of recklessly or knowingly including misleading
detail in audit reports;

• A simpler, more accessible regime for running private companies;

• Enhanced rights for indirect investors;

• Greater use of e-communications. If a company decides to use electronic
communications, shareholders will be deemed to have agreed, unless they actively
object. This includes publishing relevant information on a company website, in
which case shareholders must be notified separately on where to find the
information. This should lead to large savings for listed companies, says the

• Private companies will no longer need unanimity for written resolutions to
take effect, meaning that companies will no longer need to hold shareholder
meetings to gain a higher level of shareholder approval. Consequently, private
companies will no longer need to hold annual general meetings;

• The concept of authorised share capital is to be abolished, so companies
will no longer need to limit the maximum number of shares that can be allotted;

• A new power for the government to require institutional investors to
disclose how they exercise their votes;

• A new power to allow company law to be more easily and quickly amended in
the future.

Key changes to the previously published consultation proposals

• Amendments to the statutory statement of directors’ duties;

• Offences ­ the proposed extension of offences to senior executives and
responsible delegates has been dropped;

• True and fair accounts ­ a new clause requires directors not to approve
annual accounts unless they are satisfied that they give a true and fair view;

• The proposed right for members of quoted companies to requisition a
resolution within 15 days of publication of the annual accounts has been

Confusion ahead

But the proposed changes are not without criticism. Law firm Travers Smith has
raised a number of concerns regarding the government’s planned amendments. The
firm says that while the government’s aim to consider whether to require
institutional shareholders in quoted companies to disclose how they have voted
is laudable, the firm questions whether such a move will actually benefit

Travers Smith also questions whether the government’s plans to monitor
auditors more closely will simply lead to increased audit fees and believes that
some of the new measures, such as the statutory directors’ duties, will lead to
uncertainty, increased legal costs and additional bureaucracy. Instead, the firm
says that the government might better achieve its objective by way of best
practice guidance.

Oliver Barnes, partner in the corporate finance department at Travers Smith,
points out that “directors will now be required to ‘promote the success of the
company for the benefit of its members’ whereas they were previously required to
‘act in the best interests of the company’.”

But he adds that “what happens where the interests of a company and its
members are not aligned? The new statutory rules on directors’ fiduciary duties
will be inherently less flexible than common law, added to which the absence of
a corresponding framework of statutory remedies for breach of these statutory
duties could lead to confusion.”

Barnes also points out that there may be some confusion about the duties of
directors who hold multiple directorships. “The wording in the latest proposals
is a little vague, saying that the new statutory duties replace the common law,
but there will be scope for the courts to ‘interpret and develop’ these. For
example, directors will now have a duty to avoid an interest which ‘may possibly
conflict’ with the interests of the company. Therefore, one needs to ask what
will happen to those directors with multiple directorships? The legislation as
it stands is not clear.”

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