One of the provisions of the Small Business, Enterprise and Employment Bill (the Bill) that has caused some consternation is the proposal in part 7 that the Companies Act 2006 (the Act) be amended so that a person may not be appointed a director of a company unless that person is a natural person. 

This would prohibit the use of corporate directors by UK companies (a corporate director being a legal person (such as a company) as opposed to a natural person (an individual)).   The current position under section 155 of the Act is that companies are required to have at least one director who is a natural person, but other directors can be corporate.  The Bill goes on to provide, however, that the Secretary of State can make exceptions to this blanket prohibition and Department for Business, Innovation and Skills (BIS) has recently issued a consultation paper (CP) seeking views on the circumstances in which the use of corporate directors could be allowed.

BIS proposes the following exceptions:

  • UK companies with shares admitted to trading on regulated markets (for example, the main market of the London Stock Exchange).  The argument here is that such companies are already subject to high standards of corporate governance and transparency.  There would be no size criteria in order to qualify for the exemption (as is the case for other exemptions - see below).  The Government already intends to exempt such companies from the requirements to provide information for the register of people with significant control on the basis they are subject to the requirement of the Disclosure and Transparency Rules, particularly the Vote Holder and Notification Rules (DTR5), and the approach here is consistent.  In practice, however, this exception will be of little significance, at least so far as the LSE is concerned, as listed companies rarely, if ever, have corporate directors anyway.

The CP asks whether the exception should apply to subsidiaries of a listed entity and whether the nature of the subsidiary (dormant, wholly owned etc), the nature of the relationship between parent and subsidiary and the nature of the corporate director are all relevant. (There are many groups which make use of corporate directors in the case of subsidiaries and it could cause them a fair amount of administrative work if their use of corporate directors was prohibited.)

  • UK companies with shares admitted to trading on prescribed markets in the UK (for example, the Alternative Investment Market (AIM)).   BIS's argument is that such companies are subject to some, but not all, of the requirements of companies with shares admitted to trading on regulated markets, particularly DTR5, and will be similarly exempt from the requirement to provide information for the PSC register.  The subsidiary issues are the same as for a company with shares admitted to trading on a regulated market. 
  • Large public companies in group structures.

Some public limited companies do not have shares admitted to trading on any market and are therefore not subject to the same requirements in relation to corporate governance or transparency.  BIS questions whether large public companies (and note that all public companies are considered large for the purposes of Part 15 of the Act) are similar to listed companies and so should be similarly exempt from the prohibition.

BIS questions whether any exception should apply to all public companies, only to large public companies or only to large public companies in group structures.  The same questions concerning subsidiaries are asked.

Companies are considered large for the purposes of the Act if they do not fulfil the qualifying criteria to be considered small or medium under the provisions of Part 15 of the Act.  This means a company, at its balance sheet date, meeting two of three criteria: more than 250 employees, a balance sheet total of more than £11.4 million or turnover of more than £22.4 million.  For the purposes of this CP, however, BIS is looking at the proposed thresholds in the Accounting Directive which is expected to be implemented in January 2016 which has higher thresholds of 250 employees, £36.1m turnover and £18 million balance sheet.

Although these companies are not subject to the same requirements with regard to corporate governance, transparency and disclosure as companies with shares admitted to trading on regulated or prescribed markets, BIS suggests such companies are likely to have high corporate governance and transparency standards and, therefore, to be at low risk of abuse so as to warrant an exception to the prohibition.

  • Private companies

Again BIS suggests that size might be a key criteria here and that large private companies might be suitable for an exception to the prohibition on corporate directors as opposed to small or medium sized companies – again using the argument that larger companies are more likely to have higher standards of corporate governance and transparency.   BIS also questions whether a private company exemption should only apply to large private companies in a group structure although it is difficult to see a logic for this.

  • Charitable companies

BIS's view is that a complete exception for charitable companies is not appropriate but suggests that a limited exception might be appropriate if a charity is appointing another charity or a public body as a corporate director. BIS also questions whether an exception should apply only to charities of a certain size.

  • Corporate trustees of pension funds

Having taken soundings from the pension industry BIS is minded to allow corporate directors of corporate trustees to continue on the understanding that such corporate directorships are rare, restricted to well established larger companies, generally transparent and subject to regulation by the Pensions Regulator.  However, BIS is seeking any information from those responding to the CP which contradicts this view.

  • Open Ended Investment Companies (OEICS)

These are companies incorporated under the Open Ended Investment Companies Regulations (2001) and not subject to the Act.  They are required to use Authorised Corporate Directors approved by the Financial Conduct Authority. No change to this regime is proposed as part of the reforms proposed by the Bill

Other entities which can appoint legal persons to key roles:

  • Limited Liability Partnerships (LLPs)

LLPs can appoint corporate members and do not need to have individual members.  BIS has received representations that the structure of LLPs and the value of having corporate members as a means of securing investment would mean that a restriction on corporate members would risk restricting investment in LLPs.  BIS proposes therefore that the use of corporate members should continue unchanged.

  • Societas Europaea (SEs)

An SE is a European Public Limited Liability Company that can be created on registration in any one of the Member States of the European Economic Area. Members of the supervisory organ of an SE are broadly equivalent to directors.  Article 47 of the European Company Statute allows this and so BIS proposes that the prohibition on corporate directors should not apply to SEs.

  • Corporations sole

A corporation sole can act as a director under the Act and when it does it is considered to act as an individual director.  BIS does not intend to alter this.

Comments on the Discussion Paper can be submitted until 8 January 2015. 

A copy of the CP can be found here.