Company Law Reform

The Companies Act 1985 currently regulates most day to day aspects of UK company activity, but this is about to change.

There is before Parliament the Company Law Reform Bill - this will make major changes to all aspects of corporate governance. The Bill is very large and highly technical; it has been drafted with the assistance of private business organisations and their representative bodies.

The 1985 Act has often been criticised, for imposing excessive regulatory burden on small private companies. The rationale behind such regulation is well founded - protection of creditors and minority shareholders from unscrupulous and maverick directors and majority shareholders, who seek to hide behind the veil of limited liability.

The reality, for the most part, is different. Most small companies are prudently run by directors who are also majority shareholders. They are forced to comply with regulations created with larger (often public) companies in mind. this results in wasted costs, time and resources.

So what will change under the new Act?

It is envisaged that private companies may no longer need to have a company secretary and may no longer be required to hold Annual General Meetings. Furthermore, the ‘Whitewash Procedure’ (where a company financially assists the purchase of its own shares) is likely to be simplified.

What we know is that there will be a major overhaul in the duties imposed on directors; this will have a significant impact on all company directors in the UK, from the largest to the smallest companies.

Under the 1985 Act, directors were obliged to act in the ‘best interests’ of the company. This obligation has been replaced with six factors to which directors must ‘have regard’:

• the interests of employees
• long term consequences of decisions
• community and environmental impact
• fairness among members
• relationships with others
• reputation

This potentially creates a number of problems, as directors will need to have regard to these factors in every decision they make. How much investigation is needed to ‘have regard to something’? What happens if the director is ‘wrong’?

It is likely that a consequence of this new level of uncertainty will be an increase in all aspects of procedure surrounding directors’ decision-making ability, as they endeavour to safeguard their positions by justifying their decisions.

It would be easy to be overcritical of the Bill; that would simply be an academic exercise. It will be years before we reach a comfortable level of certainty, regarding the provisions of the Act which will follow.

Directors and officers of companies will need time to get to get to grips with the different obligations imposed on them; Courts will need to clarify the new law in the inevitable areas of dispute which will arise.