Getting down to business
With the release of government plans to implement arguably the most fundamental overhaul of company law for 150 years, Lucy Hickman speaks to corporate solicitors about the possible effects on business and lawyers
After three years of extensive consultation and drafting, the independent company law review steering group - charged with drawing up proposals to modernise the UK's company law - has at last produced its final report.It recommends sweeping changes to the existing regime, including compulsory use of new technology in annual reporting, a codified statement of directors' duties, the removal of complex rules on financial assistance and share valuation, an annual operating and financial review for larger companies, and the establishment of a body to review company law on a rolling basis.A radical simplification of the law for smaller and private companies is also recommended, including the removal of the need to hold annual general meetings, or to appoint a company secretary or an auditor.
Simpler administration and decision-making will also be introduced.Edward Dawes, a corporate partner at Birmingham firm Wragge & Co, says: 'This is arguably the most profound reform to company law in 150 years.
It removes a number of rules and regulations which have become little more than irrelevant bureaucracy.'He says rules such as the need for companies to maintain a charges register, for example, are ones which have no value since such details have to be posted at Companies House anyway.Charles Mayo, a corporate partner at City firm Simmons & Simmons, says: 'In producing the final report, compromises were inevitably made but the result is quite a reasonable balance in modernising company law.'In particular, it recognises the need for the UK to be competitive and the need for companies to take into account the interests of the broader community and not just those of its shareholders.'Companies will have to report not just on their financial performance but also on their social and environmental performance.
This will make companies more accountable to society at large.'SJ Berwin's head of corporate finance, Philip Goldenberg - a leading adviser to the review on directors, shareholders and stakeholders - is enthusiastic about the proposed operating and financial review (OFR).This aims to improve the quality of reporting by larger companies and cover future plans, opportunities, risks and business strategies.
It will also include qualitative aspects of business, such as skills and knowledge of employees, corporate reputation and business relationships.'The way the review has come out, directors will continue to be accountable to their companies and shareholders if solvent, or creditors if going insolvent, but they will also have to have regard to all those relationships on which companies depend,' says Mr Goldenberg.Both Mr Dawes and Linklaters & Alliance corporate partner Clodagh Hayes say that one of the most profound and welcome proposals for reform are those governing financial assistance, which Mr Dawes says can constitute a major hurdle to overcome in effecting corporate finance acquisitions.Under the current rules, most companies cannot offer financial assistance in transactions, for example, involving the acquisition of their shares.
Some exemptions do exist, says Mr Dawes, but these are construed so narrowly by the courts that in practice they are rarely relied on.Private companies sometimes may provide financial assistance by going through the 'whitewash procedure' - involving extraordinary general meetings - which Ms Hayes describes as a 'complicated pain' and which Mr Dawes says is 'cumbersome, expensive and a criminal offence if you get it wrong'.He adds: 'Lawyers make a lot of money out of complying with the current financial assistance rules, so one could say that these reforms at a stroke will significantly reduce the fee income of corporate law firms.
On the other hand, it will free up companies to do other deals quickly, smoothly and cost-effectively, which they wouldn't otherwise have been able to do.'Clients often think of lawyers in this field as expensive in that we're cost not value.
They go to a tax lawyer who will tell them they can save them 100,000 and it will cost them 10,000.
They see the value of that advice.'Mr Goldenberg says the change to the financial assistance rules will save companies around 20 million a year, and adds: 'I don't think the reforms will lead to a significant change for lawyers but they will lead to a change in culture.
They will not be needed to carry out financial assistance procedures and will be needed less often to explain directors' duties.'Currently, Mr Goldenberg says that if a company gets into a takeover bid, often lawyers and merchant bankers say that the directors' only duty is to say whether the price is fair, and not to say whether or not the deal is right.
He says that under the new regime, 'this attitude will be proved to be wrong'.Mr Dawes says that from a lawyer's point of view - depending how the final modifications are drafted - another welcome element of the reforms is that proposing a simplification of the rules governing registration of charges.'Under present law, if you don't register a charge within 21 days, it becomes unenforceable.
It is one of the most common causes of negligence claims against lawyers.
It is to be hoped that the changes will make life easier.'He adds that although the reforms are largely deregulatory in nature, one exception is that it will now be illegal for quoted firms not to have a Web site, since they are compulsorily required to post their annual report and accounts on a Web site within four months of the year-end.Mr Mayo maintains the new regime - with its determination to make migration for companies in and out of the country easier - could help attract more foreign businesses into the UK.'A modern law that is sufficiently flexible for business is a powerful attraction when companies are weighing up where to do business.
A legal and regulatory framework does matter.'The lawyers questioned are largely supportive of the proposals, although Ms Hayes does see a potential problem with the planned statement of directors' duties.
'If they want to codify it, that would make it difficult to change.
A body of common law is easier to change by way of case law.'Mr Goldenberg dismisses this notion, commenting: 'The codification of the law on directors' duties will not involve a change in the law, it merely makes it more accessible.
It's a kind of Highway Code for directors.'But Vanessa Knapp, a partner in Freshfields' corporate department and deputy chairwoman of the Law Society's company law committee, sounds a note of caution about codified directors' duties.
She says: 'Where companies are having financial problems, there is no entirely clear case law about the exact point directors' duties to creditors outweigh their duties to shareholders.'However, Ms Knapp is broadly welcoming of the report, saying that the company law committee 'is pleased the importance of company law to the economy has been recognised', and that its proposals will benefit companies with its 'simplified approach to private company regulation'.
Mr Dawes is also slightly wary of the plan to set up a body with the responsibility of reviewing company law on a rolling basis, an idea championed by the Law Society.
He says: 'I would say the proposal is fine in itself as long as they don't keep passing a plethora of minor reforms.'However, Mr Mayo embraces the idea.
He says: 'I think it is a good and necessary thing.
Its members should be drawn broadly from the legal profession and should include accountants.
It is also important that it is representative of different types of companies, whether they are small, global or high-tech because all will have slightly different requirements.'It is not yet clear if and when the government intends to implement these proposals but most of the lawyers agree that 2003 is the earliest a bill would be introduced.
Department of Trade and Industry minister Patricia Hewitt has said she would like to see legislation passed by the end of the Parliament (possibly 2006).Mr Dawes says: 'These proposals will mean a radical change which will require a massive re-education process.
There will inevitably be some crossed wires and confusion.
But rather than breaking the new laws, it is likely that companies will carry on doing things that they no longer need to do, either because they don't know about the new system or because they want to carry on operating the way they have always done.'After all, he adds: 'I still have companies asking me if they should bring their company seal to meetings, and how long ago were the laws on those changed?'Lucy Hickman is a freelance journalist
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