The company law reform bill – what next?

Bill goes off half-cocked

The first thing to say about the introduction of the company law reform bill
is ‘at last’. We have been living with the prospect for over seven years. But
now it is here, what of the bill itself?

The aims of the original review of company law included a ‘think small first’
approach, eliminating unnecessary complexity, particularly for small companies,
and bringing the myriad of company law provisions together. In this respect, the
result is only partially successful.

Certainly small companies will welcome the new accounting provisions that set
out a standalone regime for them. There are other deregulatory provisions for
small companies such as for general meetings and resolutions. How the latter
interface with protection of minority shareholders will need to be watched

The main problem is that this is not a complete reform or consolidation of
our company law. We will still have to look to the Companies Act 1985 to find
some elements. And the future is not rosy. Amending company law will be easier –
much of it will be done by secondary legislation. The Institute of Directors
fears this will lead to even more obscurity.

Certain aspects have received a lot of attention. One is the statutory
statement of the director duties. In essence, this is to be welcomed. Having
them laid down in one place, rather than in case law, makes it easier for the
director of the average company to locate and understand them. We hope, however,
that the statement remains one of general duties and there is no move towards
introducing specific elements at the behest of groups advocating their own
particular interest.

We continue to have concerns about the potential liability of directors.
While auditors will be given a power to control their liability, there is no
such move for directors, who may be made even more vulnerable by the
introduction of extended shareholder rights to bring derivative actions.

We hope the effort that has gone into this bill will be worthwhile, but fear
that companies and their directors will still face a regulatory mess.

Patricia Peter is head of corporate governance at the IoD

On target for shareholders

The company law reform bill has to be a good thing if it produces clarity for
companies and gives shareholders greater powers in managing the businesses they
invest in. The recourseto legal action for those who couldnot otherwise afford
it is also apositive move.

Currently, shareholders only have rights to bring actions for directors’
misfeasance on behalf of a company if the misfeasance could not be ratified by
shareholders and it constitutes a fraud on the minority.

The bill proposes to give all shareholders a statutory right to commence
legal proceedings against directors for negligence and breach of duty, leading
to concerns about increased personal risk and liability and the knock-on effect
on the cost of directors’ liability insurance. But are these concerns well

While shareholders will be free to commence proceedings, they will require
the consent of the court. In deciding whether to give permission, the court will
have to take account of issues such as alternative causes of action the
shareholder has available, whether the claim is in the company’s best interests
and whether or not the company’s shareholders would be likely to ratify it.

While serving as a very useful potential shareholder’s weapon, it remains to
be seen whether, with such hurdles to overcome, the proposed changes will in
practice expose directors to increased legal action, as opposed to the threat of

While the bill does not introduce the cap on auditor liability that the
accountancy profession would have liked, it does make some attempt at redressing
the balance.

Auditors will be allowed to agree a financial exposure limit with the
company, to apply to the annual audit. The courts will, however, have the power
to override any such agreement if they considerit is operating unfairly.

Hence, auditors will face uncertainty as to whether any agreed limitations
made under the bill will be enforceable unless and until a claim is pursued and
determined by the court.

Janet Legrand is a partner at lawfirm DLA Piper Rudnick Gray Cary UK

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