The Company Law Review, launched by the DTI in March 1998 under the
banner Modern Company Law for a Competitive Economy
moving towards its scheduled final report in May 2001 (leading, it
is expected, to a White Paper in 2001). The Steering Group has
produced a number of consultation papers over the period, including
three long "strategic" documents addressing a wide range of issues.
The last of these, Completing the Structure
, was published
in November 2000 and signals the final stage of the Review.
As well as refining proposals put forward in
earlier documents, Completing the Structure (which is
nearly 400 pages long) takes up a number of issues for the first
time. Some major changes are proposed. We touch briefly on the
salient areas for change below, but this is not a comprehensive
overview of the document. We have not, for example, touched on
areas where the Steering Group has dropped earlier proposals or,
having consulted, has decided that no change is needed.
The Companies Commission
A new institutional structure to underpin a new
Companies Act is proposed. The devolution of areas to a rule-making
body is intended to make it easier to keep the law up to date
through secondary legislative and rule-making powers. The Companies
Commission would have continuing oversight of developments in
company law. It would prepare an annual report on the state of
company law and advise on proposals for new legislation (including
secondary legislation) and on other topics referred to it by
Ministers. This inherent flexibility would, for example, enable the
Companies Commission to monitor the operation of the Combined Code
and determine how or whether it should be amended or extended to
Subsidiary bodies would be responsible for setting
detailed rules on both accounting and reporting and other areas
delegated to it (such as rules on the conduct of AGMs or corporate
governance codes); enforcing reporting and accounting requirements;
and ensuring that due account is taken of the needs and concerns of
private companies. There are also proposals for a specialist
tribunal to hear cases brought by the enforcement body.
It is proposed that there should be a statutory
statement of directors' duties, requiring directors to promote the
success of the company in the interests of its members, but taking
account of all relevant considerations. This would include having
regard to the long and short term implications of decision-making,
and the impact on wider relationships, such as those with
employees, suppliers, customers and the wider community. There
would be a hierarchy of obligations, with the interests of these
wider relationships ranking after promotion of the shareholders'
interests. It is also suggested that the statement should include a
comprehensive statement of remedies for breach of directors'
Improved transparency would be achieved by
requiring the annual accounts of all quoted companies, public
companies with a turnover exceeding £5 million and private
companies with a turnover exceeding £500 million, to include an
"operating and financial review" (OFR), covering all that is (in
the directors' view) material for those reading the accounts to
make a proper assessment of performance and future plans and
prospects. The OFR would be a qualitative, as well as financial,
evaluation and would include, where relevant, relationships with
employees and others, and community and environment issues
(including, for example, details of convictions for breach of
environmental requirements). The process followed in preparing the
OFR would be audited. The increased level of transparency would
feed through to takeovers, leading to disclosure in offer and
defence documents of the effect of the offer on OFR matters.
Public companies would be obliged to disclose the
training and experience of directors by including this in the
biographical details of candidates for election or re-election
provided with the notice of meeting. In the case of non-executive
directors, there would be an additional requirement to disclose
links with the company and individual members of its board.
The idea is floated that companies should be
required to disclose significant commercial relationships with
investors controlling more than 3% of the voting rights, and to
record those investors' votes. Institutional investors would be
required to disclose how their votes had been exercised, and fund
managers would have to maintain records of their voting and allow
inspection by investors, trustees and public authorities. There
would be independent audit of voting on shareholder-sponsored
resolutions. Reactions are sought as to whether there should be a
new criminal offence prohibiting companies or their officers from
using commercial pressure to induce a shareholder to change his
intentions as to voting or in relation to an offer for his
Directors' interests etc
Relationships of influence or control between a
director and another person or body (for example, a shareholder
whose nomination of the director had secured his appointment) would
be required to be disclosed.
The obligation on directors to disclose their
interests in contracts or arrangements with the company would be
confined to material interests and would not include matters
already known to the other directors (such as self-evident
interests under a director's service agreement).
It is proposed that, subject to an initial term of
three years, a director's contract of employment should be for no
more than one year unless approved by shareholders.
Loans to directors which would be prohibited under
the present law would be permissible with shareholder approval.
The DTI and Companies House are encouraged to
explore the scope for enabling directors to put a service address
on the public record, with their residential address being
available only to certain regulatory and enforcement agencies, or
on the order of the court.
In recognition of the increasing trend for holding
shares through nominees, it is proposed that companies should be
allowed (although not obliged) to let registered holders give
notice that certain membership rights (such as voting, appointment
of proxies, receipt of communications and distributions, attendance
at meetings and the proposal of resolutions) are to be exercised by
another person. Members would also be allowed to appoint proxies
for each underlying beneficial holding. As already permitted for
companies whose shares are in CREST, all companies would be
permitted to set a "record date" in order to determine who is
entitled to receive notice of meetings or to attend and vote.
It is proposed to allow public companies in their
annual returns to omit details of members who do not have a
notifiable interest (broadly, at least 3%).
It is proposed that a public company should be
allowed to dispense with AGMs by unanimous shareholder resolution,
and that there should be a uniform 14-day notice period for all
shareholder meetings (regardless of whether the meeting is an AGM
or concerns special resolutions) of public and private companies
(although the 20 working days period for the AGM of a listed
company, as required by the Combined Code, should remain). Proxies
would be permitted to speak at meetings of public as well as
private companies, and to vote on a show of hands at either.
Companies would be required to bear the costs of circulating
shareholder-proposed resolutions received in time for the mailing
of the annual report.
There are also proposals on the ways in which
minority shareholders are to be allowed to enforce their
constitutional rights. Under these:
- except to the extent that the constitution provided otherwise,
all shareholders would have a personal right to enforce any
obligation under the constitution;
- the unfair prejudice remedy would remain, subject to the focus
laid down in recent case law that, unless the shareholder is
relying on breach of the articles or some other breach of duty, he
must show breach of some sort of agreement which makes it
inequitable to confine him to his strict rights under the
- derivative actions (taken by a shareholder in the company's
name, because the wrong complained of is a wrong to the company -
such as breach of duty by the directors - rather than infringement
of the shareholder's personal rights) would be put on a statutory
basis, extending only to breach of duty by a director. Any action
would be capable of being blocked by shareholder ratification by an
Subject to the above, the powers of the majority
would be constrained only by the requirement that decisions should
be taken bona fide in the best interest of the members as a whole,
in cases of alteration of the constitution or of class rights; and
in all cases, by the disqualification of those seeking to ratify or
otherwise prevent the pursuit of their own wrong or a wrong done by
a person to whose influence they are subject.
Proposals applicable to small and private
The main focus is on simplifying the law for
private companies. Proposals include:
- a new model constitution to replace the memorandum and standard
Table A articles, but disallowing the present practice of
incorporating Table A (in whole or in part) by reference; instead,
each company's constitution would have to be self-contained. Also,
the "elective regime" (under which companies can presently dispense
with holding AGMs and a number of related and other matters) would
automatically apply from incorporation unless the company resolved
otherwise. There would be no need, unless the company had more than
one class of share, for shareholder authorisation of the directors'
power to allot unissued share capital.
- removing the need to appoint a company secretary.
- allowing written resolutions to be passed by the same majority
as would be required at a meeting (75% for special resolutions and
over 50% for ordinary resolutions), with no requirement to notify
- abolishing abbreviated accounts for small companies, and
requiring all private companies to file accounts within seven
months of the end of the accounting period. For those small
companies which do not already qualify for the audit exemption
(broadly, those whose turnover is between £1m and £4.8m), instead
of audit an Independent Professional Review (IPR) would be
required. Basically, this would involve an auditor examining the
company's financial data but without the breadth of
information-gathering of an audit.
- extending the exemptions to the prohibition on offers of shares
or debentures to the public. Confusingly, the definition of "offer
to the public" for private companies is different to the definition
contained in the Public Offers of Securities Regulations 1995,
which means a double-hurdle for private companies. It is felt that
some of the exemptions in the 1995 Regulations (for example, that
which exempts offers to 50 or fewer offerees) are inappropriate for
private companies. Nevertheless, some alignment of the definitions
is recommended. As a corollary, it is proposed to prohibit the
listing of private company securities on investment exchanges which
(unlike the London Stock Exchange) might otherwise permit this.
- allowing companies in their annual returns to omit details of
members whose holdings are less than 5%
It is proposed that the prohibition on a company's
providing financial assistance for the acquisition of its own
shares should apply to public companies only (although possibly no
longer as a criminal offence). In addition, the prohibition on
post-acquisition assistance would be extended to include assistance
by any person in pursuance of an agreement or understanding to
acquire the company's shares, whether or not the company is a party
to the agreement or understanding.
A new reduction of capital procedure which does not
involve applying for court approval is proposed. Instead, the
reduction would require a special resolution, backed by a solvency
statement by the directors. The solvency statement would not need
to be supported by an auditor's report. As a result of these
simplifications, there would be no need for the convoluted
provisions under which private companies can purchase their own
shares out of capital, and these would therefore be repealed.
Having a stated authorised share capital (in
effect, a ceiling on the directors' powers to allot) would no
longer be mandatory. The terms and manner of redemption of
redeemable shares would be required to be set out in the return of
allotments, but would no longer have to be contained in the
articles of association.
It would no longer be possible to deduct from share
premium certain expenses and other amounts presently permitted.
There are also proposals to allay concerns raised
by the Aveling Barford case that an intra-group sale of an
asset at book rather than market value may constitute a
Reporting, accounting and audit
It is proposed that quoted companies (which
includes unlisted companies whose securities are traded on markets
such as AIM, OFEX and overseas markets) should publish their full
annual report on their website as soon as it is available and, at
the latest, within 90 days of the year end. At least 15 days must
then elapse before the AGM notice is circulated to shareholders, to
facilitate the tabling of shareholder resolutions. The accounts
would be laid before the AGM and filed within 150 days.
Preliminary announcements, although not required to
be circulated to all shareholders, would have to be published on
the company's website.
For other public companies, the full annual report
and accounts would be required to be laid and filed within 150
days, and distributed to shareholders within 120 days.
In relation to audit and auditors' liability; it is
proposed that, if the range of the duty of care of auditors is to
be extended to potential investors and creditors, the duty of the
company and its directors should be similarly extended, but that
claimants should be required to prove that they have taken all
reasonable steps to protect themselves from loss.
Views are invited on a proposal for an optional
regime which would provide less onerous reporting and auditing
requirements for subsidiary companies where the parent guarantees
their liabilities; and on whether the prohibition on a subsidiary
holding shares in its parent should be extended to apply to
entities other than bodies corporate (e.g. certain kinds of
partnership) over which the parent has control.
Reconstructions, mergers and jurisdictional
There are proposals for streamlining the ways in
which companies can restructure, and for a simpler statutory merger
procedure within wholly-owned groups of companies.
Annex B (on p. 377 of the document) contains a
detailed analysis, with suggested improvements, of Part XIIIA of
the Companies Act, which governs the compulsory purchase of the
last 10% of shares for which a takeover offer is made if the
offeror obtains at least 90% acceptances. The position of overseas
shareholders is discussed, and how offers might be deemed to be
communicated to them without contravening overseas securities laws.
Also, there is a full examination of the formalities for
irrevocable undertakings to accept an offer.
"Jurisdictional migration", to enable companies to
change their place of incorporation (i.e. to migrate into or out of
Great Britain or to move between England and Wales and Scotland)
without winding up and re-incorporation is proposed.
Criteria for a coherent framework of criminal and
civil sanctions are set out (with "second tiers" applying where
dishonesty is involved) are considered, and other ways to encourage
compliance, such as warning letters and reminders, and extra-legal
remedies such as "naming and shaming".
Copies of Completing the Structure can be obtained
from the DTI (by calling 0870 1502 5000) or off the internet at
To understand Completing the Structure it
is necessary to refer to earlier documents (particularly the
strategic document, Developing the Framework, published in March
2000), but please note that these are no longer on the website.
Responses are requested by 28th February
For further information, please contact Martin
Mendelssohn at firstname.lastname@example.org or on +44 (0)20 7367
2872; e-mail; or Simon Howley at email@example.com or on
+44 (0)20 7367 3566.