||This Consultation Document is the first to be issued by the Steering Group
set up to take forward a fundamental review of company law. It:
||describes the work of the Review so far and the proposed arrangements for taking it
||analyses a number of key substantive issues for the purpose of consultation, and
indicates a preferred way forward in some cases; and
||examines issues relating to the legislative form of implementation and the
institutional structures for ongoing reform.
The terms of reference suggested in March 1998 have not been changed: the focus of the
Review remains core company law, although the need to deal with relationships between such
law and wider areas is recognised.
Approach (Chapter 2)
||The objective is modern law supporting a competitive economy, in a
coherent and accessible form, providing maximum freedom for participants to perform their
proper functions, but recognising the case for high standards and for ensuring appropriate
protection for all interested parties. Account needs to be taken of current change,
particularly globalisation, the impact of the EUs company law harmonisation
programme, modern patterns of regulation and ownership, changing asset structures and the
importance of small and closely held businesses.
In principle there should be presumptions:
||against interventionist legislation and in favour of facilitating markets, including
provision for transparency of information, wherever possible;
||in favour of minimising complexity and maximising accessibility of the rules
complexity should only arise where the substance demands it and the law should be
structured on think small first principles;
||against creating criminal offences unless the subject matter demands it; and
||in favour of allocating jurisdiction to the most suitable regulatory bodies, avoiding
duplication and conflict.
||On this basis the Review has addressed seven key areas through working
groups and made an initial analysis of accounting and reporting issues, recognising that
empirical work would be required once policy issues came into focus.
||Chapter 3 sets out the European Union and Human Rights context. Chapter 4
briefly reviews relevant trends in key foreign jurisdictions.
Areas, and Accounting and Reporting Issues
||Chapter 5.1 analyses the interests which company law should serve,
focusing on the actual changes to the law which different approaches would imply. A case
is recognised for ensuring that company managers have regard, where appropriate, to the
need to ensure productive relationships with a range of interested parties and have regard
to the longer term.
A distinction is drawn between the enlightened shareholder value approach,
which asserts that this can be achieved within present principles, but ensuring that
directors pursue shareholders interests in an enlightened and inclusive way, and the
pluralist approach, which asserts that cooperative and productive
relationships will only be optimised where directors are permitted (or required) to
balance shareholders interests with those of others committed to the company.
||It is acknowledged that current law is not widely recognised as embracing
the enlightened shareholder value approach. Options for change are assessed. The pluralist
approach and its implications for legal discretions, duties, remedies and board structures
The importance of transparency in achieving satisfaction of a wider range of interests,
and the case for enabling, or requiring, directors to satisfy wider social or
philanthropic objectives, are considered.
||Chapter 5.2 addresses the needs of small and closelyheld companies,
which are not well served by the present Act, either in substance or form. The merits of
new freestanding legislation for such companies, as opposed to an integrated rewrite
of existing law, are examined. A provisional conclusion is expressed for the latter,
rewriting the legislation on a Think small first basis, with appropriate
flexibility to suit the needs of such companies, while retaining integrated legislation
which provides for all.
||Chapter 5.3 and 5.4 make proposals for simplifying the law relating to
company formation and maintenance of share capital. These include:
||the clarification and reform of the rules relating to capacity of
companies and their agents and validity of transactions with third parties;
||removing the need for court approval of capital reductions;
||a simplified financial assistance regime, dependent on member approval and
solvency certification; and
||introduction of no par value shares. European Directive constraints on
these proposals (particularly for public companies) are recognised, but the case is made
for negotiating their reform.
||Chapter 5.5 maps present boundaries between various regulatory and
enforcement jurisdictions and raises issues of principle.
||Chapter 5.6 assesses the current international attractiveness of our law,
examines rules on international jurisdiction and application of British law and considers
possible changes. It also assesses the regime for foreign companies established here.
||Chapter 5.7 explains the relevant information and communications
technologies and assesses the case for changing the law in particular instances. Proposals
are made on company meetings, communications with members and the holding of company
information. A broad power to amend the Act to respond to change is also proposed.
||Chapter 6 describes key issues in the field of financial and other
reporting. These include the form and content of accounts; the role of accounting
standards and international standards; exemptions for small and medium sized companies;
the directors report and the case for its expansion to achieve wider accountability;
the role and responsibilities of auditors; the growth in nonstatutory reporting; and
electronic communications. It seeks initial views, on these issues and more widely, to
assist the approach to this work in the next phase.
addressed in the Document
||Chapter 7 describes related work being undertaken by the English and
Scottish Law Commissions.
||Chapter 8 discusses options for the form of new legislation to implement
our proposals, and the related question of ongoing institutional mechanisms for reform.
||Chapter 9 describes the priorities and method for carrying work forward to
the next stage, through seven further working groups1 and empirical research projects.
Further consultation on this work is expected at the end of 1999, with final consultation
on the overall outcome in late 2000.
||Since this is a high level document, there will be further consultation on
all the ground covered in it, and all that yet to be covered. This will be at a more
detailed level where the work has progressed already to initial preferences (i.e. chapters
5.3, 5.4, 5.6 and 5.7) but in other key areas will be in two stages, at a high level and
then again in detail.
||Chapter 10 restates the questions for consultation. 1: Focused on:
the range of vehicles for company organisation (including developing the proposals on the
small and closed company and the shape of the legislation); governance (i.e. the rules
governing the structure and internal relationships of the various components of a company)
(two groups); accounting, reporting and disclosure; further work on the priority issues
covered in Chapter 5; a number of more specific subjects (such as groups and solvent
mergers and dissolutions); and finally overlap and transitional questions.