Mr
Richard Sykes QC, an authority on company law and recently retired specialist
practitioner in London, explains how the Company Law Review functions in the
United Kingdom and the major areas of company law which it focuses on. This
article was first presented by Mr Sykes at a luncheon talk organised by the Law
Society in February this year.
Any
views which I express in this article are personal and do not necessarily
represent the collective view of the Company Law Review in the United Kingdom.
Company law is an aspect of the law which lies right at the heart of the
economy. Hence, a system which is transparent, comprehensible and which creates
a competitive environment and does not stifle initiative must be the target at
which reformers should aim.
Background
The
UK’s present system of company law has its roots in the middle of the 19th
Century. Some core provisions remain unchanged since that time. The Companies
Acts have been reformed from time to time — major change has normally followed
a report produced by a distinguished committee headed by a High Court judge. So,
in the 20th Century, we have had the Loreburn Report (1907), the Greene Report
(1928), the Cohen Report (1945) and the Jenkins Report (1963). There has,
therefore, been a long gap of 40 years since the last full review. In more
recent times, changes have resulted more from EU requirements than from anything
else. The Companies Act 1985, the current Act, is not new law: it is a
consolidation of various Acts dating back to 1948.
In
March 1998, the then President of the Board of Trade announced the Company Law
Review, whose function is to bring forward proposals for a modern system of
company law in the United kingdom.
I
am unable to provide a history of the Singapore Companies Acts. The present Act
was, I think, adopted in 1967, although it has been extensively amended since
then. As one can see from the side-notes to the sections, it borrowed heavily
from the UK and Australian Acts. Hence, when I open it, I find a lot that is
instantly recognisable.
The
Structure
The
Steering Group, of which I am honoured to be a member, runs the Company Law
Review, and Government ministers have stressed on several occasions that it is
our Review and not the Government’s. Whether the Government will adopt our
work is, of course, a matter for them. We meet under the chairmanship of the
Director of Company Law and Investigations at the Department of Trade and
Industry (DTI). We are a group of 14 or so individuals, including a High Court
judge and several lawyers (both practising and academic), economists,
accountants and businessmen. The Project Director is a former solicitor to the
DTI and occupant of various senior positions in British Telecom — we are
extremely lucky to have his knowledge, drive and experience. We also have a
relatively small team of civil servants assisting us.
I
should also mention the Consultative Committee. This is a relatively large body
and has representatives of most interested organisations on it: it meets
infrequently and its function is to react favourably or unfavourably to what the
Steering Group is doing. The Steering Group is, however, not bound by the views
of the Consultative Committee.
Finally,
there are the Working Groups which normally comprise a mixture of Steering Group
members and ‘outside experts’, as they are termed. Outside experts are
people with particular expertise in the subject under consideration.
In
summary, the Steering Group decides what subjects are to be tackled and in what
order, the relevant Working Group then beavers away and produces a draft which
is kicked about by the Steering Group; there may be further changes as a result
of the intervention of the Consultative Committee and, finally, a Consultative
Document is published.
The
review has been in existence for more than 18 months and the target is a final
Report, accompanied by a Government White Paper, in early 2001. Legislation is
not anticipated until next Parliament.
Major
Areas
Our
first published output, in early 1999, was a Consultation Paper entitled ‘The
Strategic Framework’. In that paper, we discussed a number of key issues and
invited consultation from interested parties on them.
The
issues were:
The scope of company law or ‘whose interests should be served?’
If
you start from the hypothesis that directors owe their duties to the company,
you must then ask the question ‘yes, but what does that mean in practice,
since the company is an abstraction?’ The debate on this topic has been
polarised around two models ‘enlightened shareholder value’ and ‘pluralist
approach’. Under the former, the company is equated with the shareholders, but
shareholders who can see the sense of acting sensibly towards other interested
parties, such as employees, suppliers, customers and creditors. Under the
pluralist approach, the interests of these other constituencies have at least
equal weight with those of shareholders.
The needs of small and closely held companies.
We
shall not recommend a separate system of law for private companies, but there is
a strong move to ensure that smaller companies are as free as possible from the
restrictions which public companies must accept. ‘Think small first’ has
been one of our watchwords.
Company formation and capital maintenance.
I
take these last two topics together. We have made good progress on both and,
indeed, have issued a second Consultation paper putting forward detailed
proposals.
On
company formation, we are proposing considerable simplification and, we hope
(the EU willing), a final burial of the ultra vires rule and of the separate
existence of the Memorandum of Association. For all practical purposes,
Singapore has in section 25 of the Companies Act succeeded in getting rid of
this rule already. On capital maintenance, we would like to see considerable
simplification on such things as reduction of capital. We are also hoping, as
far as possible, to get rid of the prohibition on financial assistance by
companies for the acquisition of their own shares. The DTI estimates that the
annual cost to business of these prohibitions is some £20m, a fair proportion
of which goes into the pockets of lawyers.
Regulation and boundaries of the law, international issues and information
technology.
Apart
from proposals for overseas companies, they remain very much under discussion
and I will say no more about them at this stage.
I
mentioned that we had recently put out a Consultation Document on company
formation and capital maintenance. We have also put out a paper on overseas
companies: the law is complex and untidy and I hope we shall get it straightened
up considerably.
Consultation
Document on Company General Meetings and Shareholder Communication
Also
in October, we put out a Consultation Document on Company General Meetings and
Shareholder Communication and I want to say a little about this paper and the
issues discussed in it. I have been chairing the relevant working party.
Most
of the discussion has been focussed on the Annual General Meeting (AGM).
Extraordinary General Meetings are normally — not always — affairs which
pass without undue difficulty in order to implement some policy already agreed
by the Board. Most of the discussion has been focussed on large listed
companies.
If
we look on the bright (or perhaps theoretical) side, the AGM is the one occasion
when the Board accounts to the shareholders as a whole for their stewardship and
when the shareholders are able to question the Board and discuss the affairs of
the company. It should be an occasion for good, serious and significant debate.
It is also the occasion when the democratic process produces suitable directors
to serve the company.
The
evidence suggests that the reality in the United Kingdom is in most cases rather
different. It is different because the major institutional shareholders, who
have access to the Board, are not interested in the AGM and very often the Board
say as little as possible to those shareholders who are present. Finally, there
are frequently shareholders present whose agenda is either to disrupt the
meeting or, at any rate, to pursue a line of questioning which is not related to
the company’s business.
Most
people recognise that there is a problem with the AGM of these large listed
companies. The AGM in its historic form does not seem to be working as it
should.
Most
people believe that there should be some form of annual accounting to
shareholders by Boards and an opportunity for shareholders to question the
Board’s performance and stewardship— I certainly do.
The
big question — to which neither I nor the Company Law Review has an answer —
is ‘what to do to revive the AGM or what do we substitute?’
Those
with a technological bent will no doubt say, ‘Quite simple — do it all on
the Internet and have a virtual meeting’. My response is: ‘What about people
who are not technologically competent?’ I believe that some time in the
future, meetings may become electronic, but we certainly cannot, at this
juncture, legislate for the virtual meeting to the exclusion of the physical
one.
A
matter which has been much debated over the past few months and one on which we
shall be consulting is whether we can put in place a system simpler than that
which exists at present to facilitate voting and receipt of documents by
beneficial owners of shares without breaching the important principle that a
company is not concerned with proprietary interests other than those of the
member whose name is on the register of members. Quite often, a chain of
intermediaries means that it is far too complex or too late to organise for the
beneficiary who wants to vote to do so.
According
to my understanding, these problems do not exist in Singapore because of the
existence of the Central Depository System.
Consultation
Document: ‘Developing the Framework’
We
published a major Consultation Document in March 2000: it is somewhat grandly
titled ‘Developing the Framework’. I will mention the main subjects
discussed in it.
The
first is Corporate Governance from the directors’ perspective — in other
words, the question to whom do the directors owe their duties and what are those
duties?
Section
15 of the Singapore Companies Act puts in statutory form the, or some of the,
duties of directors. We have never had equivalent provisions in the UK and have
relied on the common law: until now, I have been an ardent supporter of leaving
the matter of the common law so that there is scope for development by the
judges. However, I and others are coming round to the view that a statutory
statement could indicate also that directors must not ignore the interests of
employers, suppliers, the community and the environment, whilst still owing
their duties to the company. Such a statement, together with extensive
obligations to report annually on employee, supplier, community and
environmental matters seems to the Company Law Review to be a suitable halfway
house between a strict shareholder value and a pluralist model. This is what we
are recommending and have even suggested a preliminary draft of the statement of
directors’ duties (ch 3.37).
Secondly,
Corporate Governance as respects shareholders. We return to the AGM question and
suggest some minor reforms which will, we hope, make AGMs more lively. We have
carefully considered shareholders’ remedies and will be making proposals,
particularly on our equivalent of Singapore’s section 216.
The
next topic is accounting and reporting and there are some quite far-reaching
proposals here.
The
other main subject is small and private companies. Certainly, the attempt has
been to make such companies much more free from the various restrictions and
obligations which the Companies Act presently imposes on them and to simplify
their accounting. The vast majority of companies in the UK are private companies
and amongst those a large majority are owner-managed with a handful of
shareholders. For such companies, the panoply of regulation, eg having a Company
Secretary, is quite inappropriate. We have also taken a radical look at
accounting by private companies and we recommend different levels of financial
reporting for different sized companies. Size, we suggest, should be judged by
three criteria:
turnover;
number of employees; and
balance sheet totals.
Those
are the main topics of the March Consultation Document.
Other
areas
What
else have we got to do? At the moment, there is a Working Party on a very
important subject which we call boundaries, which means how we organise the
material between primary legislation, secondary legislation and other forms of
regulation. For example, in the area of accountancy, it might well be that
primary legislation would create a very general framework and leave the rest to
the Accounting Standards Board and leave enforcement to the Financial Reporting
Review Panel. There is also a Working Party on sanctions. It is considering what
is the most effective way to prevent or punish breaches of company law.
Both
these groups are already in full swing and indeed hope to complete their work in
early summer.
That
leaves two main topics — groups of companies and mergers, take-overs and
schemes of arrangement.
Once
we have covered all the main topics, we have to refine our proposals and come up
with a draft Bill in April 2001: we now have a parliamentary draftsman in the
team.
Capital
Maintenance — Is It Still Relevant?
It
has been a fundamental principle of our company law that in return for the
privilege of limited liability, shareholders may not have a return of the
capital paid up in their shares except through a procedure confirmed by the
courts. It is a relatively common procedure in the UK and also in Sinagapore.
However,
we have to ask the question whether that is all relevant and necessary today? I
believe that if you ask bankers and other institutional lenders whether they
regard issued share capital as significant, their answer is likely to be, ‘Not
really — we are far more interested in cash flow.’
Inroads
into the sanctity of capital have been made by provisions in the UK, Singapore,
Hong Kong and other Acts permitting repurchase of shares, though in the main
this is only out of profits.
Some
jurisdictions — Bermuda, Australia and New Zealand, for example — have all
done away with court application and simply require a Special Resolution with a
newspaper advertisement for creditors.
Our
Company Law Review was all for simplification of the requirements — a
shareholder resolution and a declaration of solvency by the directors. Our
proposals have on the whole been warmly welcomed, though the legal profession is
not too happy.
Financial
Assistance
Section
76 of the Singapore Companies Act and its equivalents (there is even one in EU
law now) were introduced as a matter of theory to bolster the maintenance of
capital regime. Obviously, the prohibition in section 76 on companies buying
their own shares is a maintenance of capital measure. However, I have come to
have serious doubts about those provisions of section 76 which are concerned
with financial assistance by companies for the acquisition of their own shares.
Anyone
can see that it is wrong for directors of a company to lend the company’s
money to an insolvent to enable him to buy shares in the company, but is it any
more wrong than to lend such a person money to buy shares in another company or
to put the money on a horse?
That
is at the heart of what is beginning to cause me to have doubts. Lending money
to someone to buy shares in the company may be a perfectly sensible commercial
transaction; if it is not, then there may be a claim against the directors, but
it is surely a claim which is nothing to do with maintenance of capital — it
is to do with misfeasance in being profligate with the company’s money.
Over
many years, I spent a disproportionate amount of time in advising on section 76
and its equivalents in the UK, Hong Kong and various other places. I now have
serious doubts as to whether the prohobition should be there at all and so does
the Company Law Review.
Is
the Companies Act of Singapore Perfect?
If
I offer some criticism of the Act, I hope you will not think me arrogant. I do
have at least 20 years’ experience of familiarity with the Act, so I have
struggled with the difficulties.
If
I have a structural criticism of the Act, it is that it has borrowed, as it
readily acknowledges, from both Australia and the UK and the two imports do not
always sit very comfortably together.
Richard
Sykes QC
Member,
Steering Group
Company
Law Review, UK