Sweeping changes to corporate law are going into effect in the United Kingdom this month, as the country implements an overhaul of the British Companies Act—the largest piece of legislation ever passed by Parliament—that will address everything from audits to investigations to economic development.
The law, which received final approval in November, is intended to be a framework to undergird the British economy, currently in its longest period of sustained growth since the Victorian era. The government’s move should also be seen against the global movement by nations to buttress corporate governance and Britain’s efforts to benefit from its membership in the European Union.
Notable contents in the law include steps to simplify regulatory hurdles for the small- and medium-business sector, plus a strengthening of already strong powers given to shareholders over company board members.
The British government says the legislation consolidates existing provisions in clearer language and, at the same time, introduces reforms through amendments. In addition, it adopts EU requirements, such as revisions to the Fourth and Seventh Company Law Directives (due for implementation in 2007), and creates a mechanism to adopt future EU directives as they transpire. Overall, the new British Act replaces its predecessors from 1985, 1989, and another from 2004, that cover audit, investigations, and community enterprise.
Unsurprisingly, Britain’s Department of Trade and Industry says the legislation will “help ensure Britain remain one of the best places in the world to set up and run a business.” The law will minimize the regulatory burden on business via Britain’s famed “light touch” to regulation and compliance, which the DTI quantifies as savings of around $500 million a year, including up to $200 million for small businesses.
The first measures of the British Act, coming this month, allow electronic communications by companies with their shareholders. These measures will contribute around $100 million to the total savings, according to the DTI.
Also in January, the British package will be implementing provisions of the EU’s Takeovers Directive. As a whole, all provisions of the Companies Act will be effective by October 2008. Various audit provisions of the EU’s Eighth Directive, however, will have to be in force earlier to meet a deadline of June 29, 2008.
The law also bolsters shareholder engagement, which is being promoted through enhancing the powers of proxies. In general, a major distinction of British (and Irish) company law compared with most of the rest of the world is the relative might they give to shareholders. Company directors in the United Kingdom can be considered almost as agents of the owners, in contrast with the independent status of directors in America.
Rickford
Jonathan Rickford, director of the Company Law Centre at the British Institute of International and Comparative Law and head of a steering committee that advised the government on its reforms, praises the law as making the United Kingdom a far more practical place to do business. “We have the most shareholder-orientated attitude,” he says.
In parallel, the legislation requires institutional investors to disclose how they use their votes. The government has made clear that it hopes the market will provide such disclosure voluntarily, without specific regulations to force the issue.
Duties Of Directors
EXCERPT
Below is an excerpt of the British Companies Act, pertaining to directors' fiduciary duties.
Duty to promote the success of the company
A director of a company must act in the way he considers, in good faith, would
be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
the likely consequences of any decision in the long term,
the interests of the company’s employees,
the need to foster the company’s business relationships with suppliers, customers and others,
the impact of the company’s operations on the community and the environment,
the desirability of the company maintaining a reputation for high standards of business conduct, and
the need to act fairly as between members of the company.
Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.
Duty to exercise independent judgment
A director of a company must exercise independent judgment.
This duty is not infringed by his acting:
in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or
in a way authorised by the company’s constitution.
Duty to exercise reasonable care, skill and diligence
A director of a company must exercise reasonable care, skill and diligence.
This means the care, skill and diligence that would be exercised by a reasonably diligent person with:
the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
the general knowledge, skill and experience that the director has.
Duty to avoid conflicts of interest
A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).
This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.
This duty is not infringed:
if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
if the matter has been authorised by the directors.
Authorisation may be given by the directors:
where the company is a private company and nothing in the company’s constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors; or
where the company is a public company and its constitution includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with the constitution.
The authorisation is effective only if—
any requirement as to the quorum at the meeting at which the matter is considered is met without counting the director in question or any other interested director, and
the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.
Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.
Source
U.K. Companies Act of 2006
Important measures in the Companies Act specify the duties of directors as well. The rules make it clear that directors must act in the interests of shareholders, but in doing so, they must pay regard to the longer-term consequences of their decisions. Directors also are bound to consider the interests of employees and the relationships with customers and suppliers.
Other broad-ranging factors that directors have to consider in their decision-making include the effect of the company’s operations on the community and environment and the desirability of maintaining a reputation for high standards of business conduct. The law also calls for shareholders to ratify actions by directors, similar to the practice that exists in Austria, Germany, the Netherlands, and Switzerland.
The duty “to promote the success of the company broadly” replaces the existing fiduciary duty “to act in the company’s best interests.” The meaning of “success” for the benefit of the company’s members as a whole is unclear, so the British the Government has stated that “success” in this context usually will mean a long-term increase in value for the business. The government is expected to issue further guidance in due course.
Some have worried that this duty, combined with the codified derivative-claims provisions—which clarify the procedure and criteria for minority shareholders to launch lawsuits in the name of the company—will result in mass litigation.
But Liz Cole, who deals with company law at the Institute of Chartered Accountants in England and Wales, says such fears “are likely to be unfounded,” because the procedure includes various hurdles for claimants. For instance, before a claim can be filed, the litigant must demonstrate a prima facie case looking solely at the claimant’s evidence—which, Cole says, should prevent nuisance claims from proliferating.
Cole adds that in the United Kingdom, the director is only liable for losses by the company. “And so, unlike in U.S. securities class actions,” she says, “any damages recovered will be payable to the company, rather than [to] the suing shareholder.”
Concessions For Auditors
Another contentious issue is auditors’ liability. The Companies Act permits shareholders to allow limits to the auditors’ liability to the company, but it also includes a new offense by auditors for “recklessly or knowingly including misleading, false or deceptive matters in an audit report.” Britain’s Association of Chartered Certified Accountants described the language as “an alarming clause for auditors … a simple, honest mistake could land them in legal hot water.”
John Davies, head of business law at ACCA, also frets about a clause that says there is “no need for a private company to have a company secretary unless the company wants one.” The ACCA view, he says, is that this move might undermine the quality of administration and accountability in the small-company sector, especially since small companies are already exempt from having their annual accounts audited.
Overall, however, most observers of British governance say the bill does a respectable job at achieving its goals. “Looked at in the round, [the Act has] done a reasonable job,” says Steven Durno, policy adviser on company law at the Law Society in London. “Not like [Sarbanes-Oxley], it won’t have companies decamping to the nearest available escape, which in the case of the U.K. would be the offshore island of Jersey.”
In Brussels, Michael Weiss, a German official in the European Parliament, and another official from the European Commission, each pointed out that it is unwise to compare British regulation, with its basis of case law, and regulatory schemes of other EU countries, which have Napoleonic codified legal systems.
Regardless, Britain’s overhaul of its Companies Act is relevant to various international scenarios around the world. Both within the EU and elsewhere, there is the introduction of international financial reporting standards based on principles rather than codes. And in the United States, there is the recent call by Hank Paulson, treasury secretary, for a scrutiny into the regulation of capital markets, with ensuring “international competitiveness” as a key goal.
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