We reported in the June 2010 issue of this newsletter that the government had launched a review of the Companies Act 2006, with the aim of assessing its impact on companies and shareholders. The review focused on a number of key measures, including the new rules on directors' addresses and the codified directors' duties. A report detailing the outcome of the review was published at the end of last year, and this article discusses some of its key findings.
Scope of the report
Understandably, the government felt that it was impossible to conduct a full review of an Act comprising 1,300 sections (and which had spawned numerous pieces of secondary legislation), and so the review was confined to a number of the Act's most significant provisions. Among the topics covered were:
- the statutory statement of directors' duties, in particular the duty to promote the success of the company
- the new regime governing the disclosure of directors' home addresses - under the Act, directors are no longer required to make their home address available for public inspection
- the business review, the scope of which was expanded quite substantially in relation to listed companies
- auditor liability limitation agreements
- the model articles under the Act, which replace Table A under the Companies Act 1985
- the improved regime governing the use of written resolutions by private companies
- trading disclosures (that is, the disclosure of company details in letters, emails, websites and business premises).
Nature of the review
The review consisted primarily of a series of one thousand telephone interviews with companies of different sizes, supplemented by fifteen in-depth interviews with institutional stakeholders such as the Law Society and the Institute of Directors.
For a document which runs to more than 350 pages (including extensive appendices), the report does not contain quite as much useful information as one might expect. Large portions of it are devoted to the raw data gathered by the researchers and to detailed analysis of that data by reference to particular categories of company. While much of the content will, therefore, be of limited interest to the casual reader, the findings do provide a number of useful insights into the Act's impact.
- The report notes that the perception of the reforms overall is that they are primarily about "housekeeping" and modernisation, as opposed to radical change. Although specific areas of law have undergone fundamental change, one suspects that the government will be relatively happy with this assessment. The consultation paper which launched the reform process more than a decade ago suggested that many of the principles underlying the regime were sound, and on the whole the government's aim was, indeed, more to modernise the regime than to re-balance it altogether.
- In response to the perceived risk of intimidation from activists, the Act introduced various measures to restrict the availability of details of directors' and shareholders' addresses. While many of the directors who are taking advantage of the new option of placing a service address on the public record appear to be doing so simply because the option exists, a significant proportion are doing so out of concerns about their safety, which would seem to vindicate the government's approach in this area. It is less clear that the new regime governing access to shareholders' addresses via the register of members is working as the government intended, because the report did not find a single instance of a company referring a request to inspect the register to the courts on the basis that it was not made for a "proper purpose".
- In relation to the codified directors' duties, the success duty, which was designed to encourage directors to look beyond short-term financial benefits to their company, to matters such as the impact of the company's actions on the environment and the community, does not appear to have had a significant impact on the way in which directors act. While some directors have no doubt always had regard to long-term issues, and so have not had to change their behaviour in light of the new duty, the government may be slightly disappointed that the duty has not had more of an impact. On the other hand, the report notes that awareness of the duty is extremely high (100% among quoted companies), and perhaps that is as much as can be expected at this early stage.
In our experience, the chief concern in relation to the success duty is that it can be difficult to decide how to record compliance. While every situation needs to be assessed on its facts, our view generally is that directors should take a fairly pragmatic approach, and avoid a box-ticking exercise in which board minutes automatically list all the factors to which directors are required to have regard. The report cited a concern that there was no official guidance on how to record compliance with the statutory duties generally; we agree that guidance would, in theory, be welcome, but the government's reluctance to provide assistance in such a complex and fact-specific area is understandable.
The report does not deal in detail with companies' views on the conflicts duties, but it does cite an observation that the new regime is clearer than the old one. Be that as it may, our experience is that the new provisions can be quite difficult to get to grips with, and on a more practical level we are finding that the logistical exercise involved in authorising potential conflicts in connection with multiple directorships within groups of companies can be quite substantial.
- More companies may be entering into auditor liability limitation agreements than observers had expected. According to the report, nearly one in five companies has entered into an agreement or has taken steps in connection with entering into one. It may be that this statistic is a little misleading, since there is no guarantee that a company which has taken steps towards entering into an agreement will actually enter into one, and certainly in our experience there has been little interest among listed companies, but nevertheless this is one of the report's most eye-catching findings.
- While many quoted companies have adapted to the expanded business review relatively well, a significant minority report that they are finding it more difficult to prepare. Furthermore, nearly three-quarters have not received feedback on the new business review from their shareholders. This is, of course, an area which remains the subject of intense scrutiny by the government: we are still awaiting its response to last year's consultation on the future of narrative reporting, which followed the coalition's commitment to re-instate an operating and financial review (OFR).
- Relatively few companies which were formed before October 2009 have taken the opportunity to adopt new articles based on the model articles under the Act. Our experience over the Act's three-year implementation period was that some companies intended to defer a full review of their articles until the legislation had come fully into force or, indeed, until such time subsequently as they needed to amend their articles for some other reason. Although that was a perfectly sensible approach, we are still seeing articles based on Table A well over a year after the final implementation date, and companies should increasingly be thinking about opportunities to carry out a full review.
- Two of the measures designed to make life easier for companies have received a warm welcome. The report indicates that the majority of private companies use the new written resolution regime, which allows written resolutions to be passed without the unanimous consent of the shareholders, and one suspects that a large proportion of those that do not are single member companies, which have at their disposal the section 357 procedure. Companies also appear to be taking advantage of the provision allowing a company to execute a document through the attested signature of a single director.
- Take-up of the option for private companies to dispense with a company secretary seems to be relatively low. This is not surprising, since the work traditionally carried out by a secretary still needs to be done, whether or not anyone formally occupies that office.
- Somewhat surprisingly, companies did not report significant problems with the regime governing trading disclosures, which largely replicates the regime under the Companies Act 1985 (as extended in January 2007). Given the difficulties involved in determining how to comply with the obligation to disclose company details in emails and on websites, particularly in the context of large groups, this issue might have been expected to be the subject of some complaints, but possibly the memory of any problems has faded by now, given that the extended regime has been in force for some time.
The report should be taken with a pinch of salt. For a start, it does not touch upon large swathes of the Act. Furthermore, it is based on a relatively small sample of companies and stakeholders (albeit that the latter will have in-depth knowledge of companies' views of the Act). More generally, it is simply too early to make an accurate assessment of the Act's success or otherwise, given that the final tranche of measures have, even now, been in force for less than 18 months.
Having said that, the facts and figures contained in the report are a welcome addition to the on-going debate over the extent to which the Act has fulfilled the government's ambitions. Until now, that debate has been based almost entirely on anecdotal evidence.
The report was designed more to assess the Act's impact than to identify areas in which specific amendments may be required, and so it is unlikely to lead to any changes in the law in the short term (save that the government is already reviewing the regime governing narrative reporting). That is not to say, though, that the Act is set in stone. While fundamental reform is surely not on the agenda for the foreseeable future, the government has consulted on a handful of possible minor changes over the past year or two; elsewhere in this newsletter we discuss its recent announcement on plans to amend the contents requirements for statements of capital. We also contributed last summer to a joint note by the Law Society Company Law Committee and the City of London Law Society Company Law Committee detailing concerns about specific provisions of the Act, and presumably the government will in due course undertake a further, more technical, assessment of the new regime.