Gerry Sutcliffe MP

COMPANY SECRETARIES CONFERENCE

I am delighted to be able to take part in what I see is a full and interesting programme today. I regret that I am only able to stay for a short while. But I hope that in that time I will be able to outline the Government’s vision for the Company Law Reform Bill.

My Department’s key goal is to raise UK competitiveness. An effective company law framework is one of the essential ingredients for a successful, competitive economy.

An effective framework gives people the confidence to start, grow, invest in and deal with business. It’s right at the root of how business functions.

It is the basis on which companies are formed, operated and managed.

It lays down the rules and procedures through which companies are controlled and financed.

It provides the means of accountability for the exercise of corporate economic power.

It is the means by which shareholder interests are aligned with those of directors.

And it is of course a key factor in ensuring confidence in business and stability in financial markets.

Achieving an effective overall framework is a key responsibility for any Government, but it can’t do it alone. Market participants, standards-setters, independent regulators and professional bodies all have a key part to play. Here in the UK, the active contribution made by these parties has helped make our system so successful.

Listening to and working with its partners, Government needs to take on three major tasks.

First, ensuring that the underpinning legal system remains effective and fit for purpose.

Second, making sure the UK is effective in influencing international developments in company law and corporate governance.

Third, working with others to spread best practice and promote appropriate market-led improvements.

We have to recognise that increasingly businesses can make choices as to where to incorporate, and recent legal judgements are tending to make such cross-border incorporations easier. We are determined that the UK should remain one of the best places in the world to incorporate a business.

In the 1990s, a consensus emerged that our system of company law needed improvement.

Over the previous 150 years the system had undergone reform in a piecemeal fashion, leading to a body of law that was increasingly complex and inaccessible, especially for smaller businesses. It was time for change.

As many of you will be aware, we commissioned the Company Law Review in 1998. Government engaged with stakeholders, experts and users of the law. We drew up a road map for reform, which commanded widespread support from business, investors, the professions and other stakeholders.

The Company Law Review pointed us towards necessary changes that sat within 4 key themes: enhancing shareholder engagement and a long-term investment culture; ensuring better regulation and a Think Small First approach; making it easier to set up and run a company; and providing flexibility for the future.

These are the themes of our planned Company Law Reform Bill.

We have already taken forward some important elements of the Company Law Review’s work. For example, in the Companies (Audit, Investigations and Community Enterprise) Act 2004 (which we know affectionately as the CAKE Act), we included measures related to company directors’ liability.

The introduction of a statutory Operating and Financial Review was another of the Company Law Review’s key recommendations, and following extensive consultation the Regulations on the OFR came into force in April this year. I notice and welcome the positive presentation you have on the OFR this afternoon.

In all our work on company law we have insisted on active consultation and involvement from a broad range of stakeholders. Their feedback has proved invaluable in helping us develop the proposals to ensure they are workable and effective.

The Company Law Reform White Paper of March 2005 presented our proposed reforms. It included some 400 draft clauses, and an explanation of the policy intent on other areas, which have subsequently been put out as draft clauses. I’d like to run through some of the main components under our four themes.

Our first theme is enhancing shareholder engagement and a long-term investment culture.

We want to promote wider participation of the crucial component of a company – its shareholders - by ensuring that they are informed and involved as they should be.

We want directors to have a clear statement of their duties. And we want them to recognise that promoting the success of the company can only be achieved by taking due account of the long-term and of wider factors such as effects on employees, on the environment, on suppliers and on customers

We intend that shareholders should be able to agree a limit to auditors’ liability, to such an amount that is determined by the Courts to be just and equitable.

We will be implementing the Takeover directive, putting the work of the Takeover Panel on a statutory footing.

We also want to facilitate the use of e-communications. This is an area that I know ICSA and their members have a particular interest in, so I will elaborate further. We are always ready to consider further suggestions for cutting business costs and so we are pleased that an industry group including ICSA has been working on the paper free holding and transfer of quoted company shares. I can confirm that the Bill will extend the existing power relating to transfer of securities so that it could be used either to permit or require this. We clearly need more information on the costs and benefits of a paper free approach before taking a decision, and will continue to work closely with ICSA and other organisations on these proposals.

Our second theme is ensuring better regulation and a “Think Small First” approach – a founding principle of our reforms.

Although the vast majority of UK companies are small, company law has been written traditionally with the large company in mind. We want to reset the balance and make the law easier for all to understand and use. To achieve this we will: restate parts of the law to make them easier to understand; provide separate and better-adapted default articles (the current “Table A”) for private companies; and simplify decision-making for private companies, for example by making it easier for decisions to be taken by written resolution, and making AGMs opt-in rather than opt-out.

Under this theme also sits our plans to abolish the requirement for private companies to have a company secretary. Obviously this point is of particular importance to you. This proposal is based on a recommendation from the Company Law Review and has been supported by many stakeholders.

Most private companies only have one director in addition to the secretary and nearly two-thirds of these companies have fewer than 5 shareholders. The Government agrees with the Company Law Review that the requirement for private companies to have a company secretary is unnecessary regulation. I should emphasise that in the current law there is no function that can only be done by a company secretary.

In the light of comments from ICSA and others, we do however accept that the proposed clauses as set out in the White Paper were unnecessarily complex, and we are revisiting the clauses to address this point. We want the Bill to make sure that private companies can operate effectively with or without a company secretary; it will not prevent any private company appointing an officer called a company secretary if the company wishes to do so.

This is consistent with other provisions in law, since companies do not need a statutory power in order to appoint officers. For instance, there is no statutory office of Chairman even though most large companies have one.

Our intention is to make sure that the director or directors of a private company understand the legal requirements laid upon them so that they make arrangements for those responsibilities to be carried out (with clarity about who is responsible for what), in the way that best suits their business. Unless the company’s articles provide otherwise, it will be for them to decide whether or not to have a company secretary. We will be supporting the legislation with clear and practical guidance.

The Bill’s third key theme is making it easier to set up and run a company. We want to remove unnecessary burdens and preserve Britain’s reputation as a favoured country in which to incorporate. We will: remove the requirement on most directors to disclose publicly their home address; abolish the requirement for a company to have authorised share capital; enable a single person to form a public company; streamline the rules on company names and trading disclosures; and make deregulatory changes to the register of past and present members which companies are obliged to maintain.

And finally, our fourth theme is providing flexibility for the future. It is all too evident that company law is not static. We intend to introduce a new reform power to allow updating and amendment as circumstances dictate. But this is not a licence to bring further change through the backdoor. We will only do this subject to rigorous safeguards for full consultation and appropriate Parliamentary scrutiny.

So what have we been doing over the summer, and what for the future?

The responses received on the White Paper and on the further draft clauses we have issued have been invaluable in finalising the Bill for Introduction to Parliament.

We expect to introduce the Bill in the next month or so, subject to Parliamentary priorities. How long it will take to get through obviously depends on Parliament, but we hope that the Bill will be passed before the summer break 2006 and at the latest during the autumn spillover. We would expect to commence urgent provisions (in particular the takeover provisions) on Royal Assent, the rest at a suitable common commencement date thereafter.

I will turn briefly to Europe. There will be another presentation on Europe following me, so I will keep myself short and focus on some high level principles.

We in the UK often pride ourselves to have the best system of company law and corporate governance in the world. “Comply or explain” is the term we proudly refer to when outlining for other nationalities the strengths of our system. So it seems to be a valid question to ask: Why do we need European action? Can Europe do us any good?

I strongly believe that European action in the area of company law and corporate governance has the potential to bring about positive effects – even to the UK. If European action relates to clear economic objectives, if it remains focused on improving cross-border activity and if it remains committed to better regulation principles it has a great potential to promote enterprise, enhance confidence in our markets, stimulate investment opportunities across borders and finally make Europe a far more competitive economy in the world. It is crucial, however, that EU action indeed not only focuses on what objectives to achieve, but also on how best to achieve them. Legislation for example should only be used where absolutely necessary. Other means such as recommendations should be considered in the first place.

There is an opportunity now to influence the forward agenda in Europe. The Commission has made it clear that it will be seeking views in due course on the future shape and direction of the action plan and that it doesn’t regard it as being set in stone. The Government welcomes this and will take steps to ensure that UK views are fully reflected in the review process.

We’ve made a start by setting out our basic approach in our recently published booklet “Promoting Competitiveness- The UK approach to EU company law and corporate governance”, copies of which are in your packs. Vanessa Knapp is going to speak about the details of the approach later but I would encourage anybody who hasn’t done so to read what the booklet has to say. It reflects the views not only of DTI but of the CBI, the Institute of Directors and a broad cross section of UK stakeholders.

The next step is for my department, working closely with stakeholders, to identify what changes we would like to see to the Action Plan so that we can present the Commission, and indeed other Member States, with a considered UK shopping list. Officials are already in touch with ICSA and other stakeholder organisations about this and will be following up over the next 3-4 months.

In this area, as in others, influencing developments in Europe is ultimately about teamwork – Government Regulators and other stakeholders working together to agree common objectives; presenting arguments effectively and consistently; and using all available channels of communication to get UK messages across. The more we do and the more joined up we are the more effective we will be. So if you feel you have views to contribute to this exercise or could help in getting UK messages across in Europe could I encourage you to get involved. We would very much welcome your help.

I hope I’ve been able to convince you today of the Government’s commitment to good quality and modern company law achieved through open consultation. Through ICSA you, as interpreters and practitioners of our company law, are an important voice on this topic. I am therefore very pleased that ICSA have had such an active involvement in its development not only by commenting formally on the White Paper and other draft clauses, but also through meetings with ministerial colleagues and officials.

We know there are huge economic benefits to be had from an effectively functioning company law framework that promotes long-term value creation. And conversely substantial costs from a system that fails to promote confidence or puts obstacles in the way of enterprise. I hope the approach I have outlined today is sufficient to persuade you that the Company Law Reform Bill will provide a framework fit for the 21st Century.