Summary: The Company Law Review

Small and Private Companies

Rules on companies’ internal administrative procedures should besimplified so that private companies:

• need not hold AGMs, lay accounts in general meeting or appointauditors annually unless they positively opt to do so;
• are no longer obliged to appoint a company secretary;
• have access to a new, simpler model constitution, designed especiallyfor small private companies;

Formal decision-making procedures should also be made simpler by:

• codifying and extending the common law “unanimous consent rule” bystating expressly in statute that any decision which the company haspower to take may be taken without observing any of the formalitiesof the Act or the company’s constitution where the membersunanimously agree.
• making it easier for private companies to take decisions by writtenresolution, without the need for a general meeting;Mediation and arbitration should be encouraged as alternatives tolitigation, in particular by creating an arbitration schemespecifically to deal with shareholder disputes.The burden of financial reporting and audit should be reduced, andthe usefulness of small company accounts improved, by:
• simplifying the format and content requirements for small companyaccounts, while removing the ability for small companies to fileuninformative “abbreviated accounts” at Companies House;
• extending the small company accounting regime so that companies whichmeet any two of the following criteria are classed as “small”:turnover no more than Pounds 4.8m (currently Pounds 2.8m); balancesheet total no more than Pounds 2.4m (currently Pounds 1.4m); nomore than 50 employees (as now);

• raising the threshold below which companies are exempt from therequirement to have their accounts audited;
• shortening the time limit for private companies to file accounts fromthe present ten months to seven months after their financialyear-end.
• Simplification of the capital maintenance regime for all privatecompanies, with, in particular, repeal of the present obscure,complex and costly rules on “financial assistance” in connection withshare acquisitions.

Directors

The basic duties of directors should be clearly set out in theCompanies Act.

The present rules in the Companies Act on directors’ conflicts ofinterest should be updated and clarified.

Directors’ contracts of employment should be limited to a period ofthree years on first appointment and one year for re-appointments,unless shareholders authorise a longer period;

There should be better disclosure on directors’ training,qualifications and other relevant information.

Shareholders

The law should be reformed to make it easier for investors who holdshares in nominee accounts to exercise shareholders’ rights andcommunicate direct with the company.

Quoted companies should be required to circulate members’ resolutionsfree of charge with the AGM papers, where the resolution has therequisite level of support and is received by a clear deadline (15days after publication of the annual report and accounts).

There should be more openness about the role of institutionalinvestors. In particular companies should disclose in their annualreport their major relationships with financial institutions;institutional investors who manage funds on behalf of others shoulddisclose how they have voted their shares; and the voting process onkey company resolutions should be audited.

Company Reporting and Audit

Most public companies and very large private companies should berequired to publish an operating and financial review as partof the annual report; this would provide a review of the business,its performance, plans and prospects, and information the directorsjudge necessary for an understanding of the business, such asrelationships with employees, suppliers and customers, environmentaland community impact, corporate governance and management of risk.Quoted companies should make their annual report and accountsavailable on a website within four months of the year-end; theyshould then be required to wait at least 15 days before settling theAGM papers for circulation, to allow time for shareholders to tableresolutions for debate at the AGM.

All public companies should be required to lay the accounts ingeneral meeting and file them at Companies House within six months ofthe year-end.

There should be no statutory extension of the auditors’ duty of careto extend it beyond that set out in the Caparo case – although thiscould be developed by the courts.

Directors and employees should have wider statutory duties to assistthe auditors. Auditors should be entitled to limit their liability tothe company and to third parties, within appropriate limits to be setby the Secretary of State.

Institutional Arrangements

A Company Law and Reporting Commission should: keep company law underreview; prepare an annual report on the state of company law andcorporate governance and any need for reform; issue guidance, andadvise on proposed secondary legislation.

A Standards Board would: make detailed rules on accounting andreporting (including the OFR); make disclosure rules in areas such asthe Combined Code and on information to be provided to shareholders;keep the Combined Code under review; make rules on matters such asthe conduct of AGMs; and publish guidance on issues within its remit.

A Private Companies Committee would examine the impact of company lawand reporting requirements on private companies, with the Company Lawand Reporting Commission and the Standards Board being required totake account of its advice.

Other Proposals to Simplify and Streamline the Law

The rules governing maintenance of company share capital should bereformed. The principle of freedom of public access to informationabout companies should be preserved, but scope for abuse should becountered by:

• preserving access to companies’ registers of members, whilerestricting the use which can be made of the information to purposesrelevant to the holding of interests recorded in the register, or theexercise of rights attached to them and other purposes approved bythe company (so as, for example, to prevent the use of shareholderlists for commercial mailshots);
• allowing directors the option of filing at Companies House a “serviceaddress”, at which they would accept service of documents andcorrespondence relating to the company, leaving their residentialaddress to be available to certain public authorities (e.g.enforcement bodies). Others, such as members and creditors, wouldhave the right to apply to the court for access to residentialaddresses;

The law on “trading disclosures” (principally the informationcompanies must disclose in business communications) should be updatedto reflect modern conditions, such as increasing use of electroniccommunications.

The law should be updated to improve the legal mechanisms used incompany restructuring.

There should be a new mechanism (with safeguards) enabling companiesto “migrate” to and from Great Britain, or to switch corporatedomicile between England and Wales and Scotland, without having to bewound up.

The existing procedures for restoring dissolved companies to theregister should be rationalised, and a procedure introduced to enablerestoration in straightforward cases without the need for courtintervention.

The legislation on foreign companies which have a place of businesshere should be simplified and updated.

There should be a separate form of corporate body designedspecifically for charities.

Effective Sanctions

Companies should be required to disclose in the annual report anycriminal convictions during that reporting year for breaches ofCompanies Act requirements on the part of the company or itsofficers.

The ‘phoenix company’ syndrome should be tackled by:

• strengthening the existing provisions on transactions between acompany and its directors;
• stronger safeguards where a director of a failed company applies tothe court to be a director of, or concerned in the management of,another company with the same or a similar name;
• interim orders for disqualification of directors in advance of finaldisqualification proceedings, to enable speedy preventative action inserious cases.