On 16 July, the Government issued the first of its White Papers on
the proposed reform of UK Company Law. The White Paper is the first
proposed legislation to result from the three year review of the
law and the consultation process conducted by the Company Law
Review Steering Group, which culminated in its July 2001 final
report. The Government's declared purpose is to bring UK company
law up to date and to provide a simple, modern and cost-effective
infrastructure for carrying out business in the UK. It has
indicated that it intends to implement many of the recommendations
made in the July 2001 report.
As the scope of the review was broad, many of its
recommendations will involve significant change for companies and
their advisers. This White Paper, which contains over 200 draft
clauses to be incorporated into a new Companies Bill, concentrates
mainly on changes which are designed to simplify the administrative
burden on smaller private companies. In addition, there are a
number of provisions which will affect larger companies and their
directors. The proposed changes include:
- requiring public and large private companies to publish in
their annual report an audited operating and financial review
(OFR), containing an assessment of the company's business,
performance and prospects, as well as its community and
environmental impact and relationships with staff. See the section
below containing further detail about the OFR;
- requiring directors of companies and their subsidiaries to
volunteer to the auditors all information which they need in order
to carry out their audit (failure to do so will be a criminal
offence); and
- changing the definition of a 'small company' for accounting
purposes, so that more companies can take advantage of the more
relaxed reporting regime;
- shortening the time limit for private companies to file
accounts from 10 months to 7, and for public companies from 7
months to 6;
- automatically removing the requirement for private companies to
hold AGMs, unless the members want them;
- making 15 days the notice period for all general meetings
(unless the members agree to a shorter notice period);
- allowing companies to give notice of a shareholders' meeting by
notifying members of its publication on a website;
- allowing proxies to speak at meetings and to vote on a show of
hands;
- giving members the right to have a poll at a general meeting
scrutinised by an auditor;
- automatically reducing from 95 per cent to 90 per cent the
majority required to permit an EGM of a private company to be held
on short notice;
- allowing private companies to pass written resolutions with the
approval of 75 per cent of the members (for special resolutions) or
50 per cent plus one (for ordinary resolutions) - instead of 100
per cent for both types as at present;
- abolishing the requirement to have a company secretary;
- abolishing corporate directors over a period of, say, three
years;
- reducing the problems for third parties where a company acts
'ultra vires', by giving new companies unlimited capacity in their
constitution, and giving directors deemed authority to exercise any
power of the company;
- creating a new model constitution in a single document, to
replace the current 'Table A' articles and the provision for a
company's memorandum to contain the objects of a 'general
commercial company';
- putting on a statutory footing the current common law duties of
directors. The draft Companies Bill envisages directors being
judged according to a combination of an objective standard (the
knowledge, skill and experience reasonably expected of a director
in that position) and a subjective one (the knowledge, skill and
experience of that particular director). As this broadly reflects
the formulation of directors' duties in existing case law, it is
likely that past cases will continue to be relevant. There will
also be a formal duty to take into account in good faith the
company's relationships with employees, customers and suppliers and
its impact on the community and environment in the long and short
term, to the extent that it is practicable to do so.
Operating and Financial Review (OFR)
The Government believes that companies should
provide more qualitative and forward-looking reporting as well as
information that is quantitative (e.g. the balance sheet),
historical (e.g. the financial results for the past year) or about
internal company matters (e.g. the size of the workforce). The
Government believes that information about future plans,
opportunities, risks and strategies is just as important to users
of financial reports as a historical review of performance.
Under the proposals, the OFR will have to contain
at least the three core elements:
- a statement of the company's business in the financial year to
which the OFR relates;
- a fair review of performance during that financial year and of
the position of the company at the end of that year; and
- a fair projection of the prospects for the company's business
and of events which will, or are likely to, substantially affect
that business.
In addition, there are a list of areas which the
directors of the company must consider when compiling the OFR.
These include relationships with employees, customers and suppliers
and the company's impact on the wider community. They also include
the company's impact on the environment.
Any OFR should be prepared on a consolidated basis
if the company is a group holding company. A company would only
need to produce an OFR where it meets two out of the three
following size criteria:
Public Companies
Turnover more than £50 million
Balance Sheet total more than £25 million
Number of employees more than 500
Private Companies
Turnover more than £500 million
Balance Sheet total more than £250 million
Number of employees more than 5000
According to the White Paper, this will catch
approximately 1,000 companies and groups. The Government estimates
that together these companies have an aggregate turnover in the
region of £1,000 billion and cover a quarter of corporate economic
activity in the UK. However, since they represent less than 0.1 per
cent of registered companies, the Government considers that the
proposed new requirements strike a justifiable balance between the
additional burden to companies and the benefits to investors of
quality reporting.
The company's auditors will be required to report
on the OFR. Their review will essentially concern the adequacy of
the process of preparation, focusing on how the report is prepared
and not on its detailed content. However, the auditors will be
required to report on the company's compliance with applicable
rules and whether the OFR is inconsistent with the financial
statements or with any other information which the auditors are
aware of as a result of the audit.
Contrary to the recommendations made by the Company
Law Review Steering Group, the draft clauses for the new Companies
Bill do not allow companies to exclude information from the OFR for
reasons of confidentiality or commercial sensitivity. The
Government has asked companies to identify examples of any issues
which they would prefer to exclude on these grounds, and for
suggestions on how, if any information were to be excluded, this
fact should be drawn to investors' attention, in order to ensure
that the OFR is not misleading.
Reductions of share capital - a simplified
procedure?
The White Paper also proposes new rules designed to
simplify the procedure for private and public companies to reduce
their share capital without having to go to Court. Private
companies will be allowed to do so if the reduction is approved by
a special resolution of shareholders and the directors make a
formal statement that the company is and will be solvent for the
next 12 months. For public companies, the same requirements will
apply, and in addition creditors will have a right to object to the
proposed reduction. The Government is specifically consulting
further on these proposals, as well as on the recommendations of
the Company Law Review Steering Group that the procedure for
companies to redeem or purchase their own shares should also be
simplified.
Consultation Period and Further
Developments
The consultation period on this White Paper,
entitled 'Modernising Company Law', runs until 29 November 2002. A
copy of the White Paper can be found online at:
www.dti.gov.uk/companiesbill/whitepaper.htm
Further White Papers are expected to be published
soon. These are likely to reflect many of the other recommendations
made by the July 2001 report, including:
- management and regulation of directors' conflicts of interest -
including disclosure of interests to the Board (and shareholders),
dealings between a company and its directors, and the sanctions
related to these;
- regulation of conflicts of interest between companies and their
major shareholders - e.g. by compelling institutional investors to
disclose publicly how they voted;
- transparency in the terms of service of executive and
non-executive directors, and controls on the length of their
contracts;
- simplification of the procedure for public and private
companies to reduce their share capital and to redeem or purchase
their own shares;
- relaxation of the prohibition on a company giving financial
assistance in connection with the acquisition of shares in itself
or its holding company; and
- the rights and remedies of minority shareholders.
The Government has also indicated that it intends
to devolve responsibility for introducing and monitoring some of
the changes relating to companies' accounts to:
- a new 'Standards Board', based on the current Accounting
Standards Board, to make and enforce rules on the form and content
of financial statements, including the new OFR, and to keep under
review the Combined Code on Corporate Governance; and
- a new 'Reporting Review Panel', as successor to the Financial
Reporting Review Panel, to enforce the rules on the form and
content of the accounts of public and large private companies.
The progress of the Companies Bill onto the statute
book will be determined by the amount of available Parliamentary
time and the approach which the Government takes. At present it is
not known whether the Government intends to bring in the changes
piecemeal, or whether it will wait until all of the areas for
review have been consulted upon and finalised before taking a
single comprehensive Bill through Parliament. In order to reduce
the amount of legislation which will require the scrutiny of the
full Parliament, the Government has already indicated that it
intends to effect many of the less controversial changes by means
of secondary legislation.
For further information, please contact:
Martin Mendelssohn
Corporate Partner
[email protected]
+44 (0)207 367 2872
(contactable after 27 August)
or
Charles Currier
Corporate Solicitor
[email protected]
+44 (0)207 367 2736
or
Peter Bateman
Corporate Solicitor
[email protected]
+44 (0)207 367 3145