Government Unveils Major Overhaul of Company Law

CORPORATE/COMMERCIAL

Government Unveils Major Overhaul of Company Law

Jennifer Brannigan examines some of the key measures included in the recently published Company Law Reform Bill.

Government Unveils Major Overhaul of Company Law

In the most substantial overhaul of company law for decades, the Government published the Company Law Reform Bill on 3 November 2005. The Government estimates that the changes, which apply directly to Northern Irish companies, will save businesses in the UK up to £250 million a year by simplifying the law and reducing regulatory burdens on businesses.

"Think Small First"

One of the key objectives of the bill is stated to be a "Think Small First" approach in response to the fact that, in the past, company law has been drafted with large companies in mind. The bill aims to redress this imbalance by making company law easier to understand, particularly with regard to accounts and audit, meetings and resolutions, company formation and reporting requirements. The changes are accompanied by a commitment to providing clear and comprehensive guidance via the English Companies House website (www.companieshouse.gov.uk) along with a greatly improved complementary service offering on that website. Key measures for the benefit of small to medium enterprises (SMEs) include:

• simpler rules for setting up a company;
• abolishing the statutory requirement to hold annual general meetings, making them "opt-in" rather than "opt-out";
• the introduction of a radically simplified set of draft model articles for private limited companies which will be much shorter and clearer than the current outmoded and user-unfriendly Table A Articles;
• abolition of the requirement to appoint a company secretary; and
• abolition of the current prohibition on private companies giving financial assistance for the purchase of their own shares

Directors

Aside from easing the regulatory burden for directors of SMEs, the bill proposes a number of changes which impact on them directly. One of the most important of these is the introduction for the first time of a clear statutory statement of directors' duties. These were previously found only in case law (i.e. decisions in individual court cases over the years) meaning they were neither clear nor widely understood. While the bill does a great deal to clarify directors' duties, it also includes an extension of criminal sanctions for breach of those duties in a move which has proved unpopular in some quarters.

Resolutions and Meetings

The bill includes measures to streamline company decision-making processes and to bring them more into line with the realities of modern business life. As well as restating such provisions to make them easier to understand, it also makes it easier to:

• make decisions by written resolution, by no longer requiring unanimous shareholder approval but rather the same level of approval necessary to pass the relevant resolution in a general meeting of shareholders (50% for a written ordinary resolution and 75% for a written special resolution);
• call a shareholders' meeting at short notice (90% rather than 95% shareholder approval); and
• communicate with shareholders by making greater use of electronic communications for that purpose.

Auditor Liability and Audit Quality

In an effort to encourage confidence in the statutory audit and ensure a strong, competitive and high quality audit market, the bill includes measures to allow shareholders to agree to limit auditors' liability to the company, so that the financial liability of the auditor relates to the auditors' responsibility for the loss. At the same time there is a greater right for shareholders to question auditors and named partners for audit reports as well as a new offence for recklessly or knowingly including misleading, false or deceptive matters is an audit report.

Conclusion

The above review is necessarily broad-brush given the wide ambit of the bill. However, the full text of the bill is available on the DTI website (www.dti.gov.uk) and is expected to become law by August 2006.

Jennifer Brannigan is an Associate Solicitor in the firm's Corporate Department advising on a broad range of corporate and commercial work.