The UK's Company Law Review Steering Group (the Steering Group) has set out its final proposals for making the law regarding corporate governance – the duties of directors and shareholders and the balance of power between them – more precise and easier to understand, and has suggested areas in which the current position could be improved. Its main conclusions and recommendations in this area are dealt with below.
The Steering Group recommended that directors' duties be properly codified, and restated in legislation.
Duty to shareholders - directors' personal
Any director who wants to pursue a business opportunity which he or she learned of through their directorship, must first obtain shareholders' approval (either for the specific transaction or by a provision in the company's articles – the latter is more usual for private companies, especially subsidiaries within a group).
The Steering Group suggests giving the board of the company (excluding any interested directors) the power to decide instead – being involved in the day-to-day running of the company they are better placed to know whether the company does or does not want to take up the business itself and whether it might be harmed by the director doing so on his or her own account.
Duty to creditors
Under statute, directors' duties are owed to shareholders, unless "the company had no reasonable prospect of avoiding insolvent liquidation" (Insolvency Act 1986). However, the courts have begun to recognize duties to creditors beginning at an earlier stage, in cases where the company has eventually gone bankrupt.
The Steering Group recognized the difficult line between requiring directors to be realistic about the company's prospects, and forcing them to be over-cautious for fear of personal liability, so stifling growth in the economy. They reached no conclusion on the topic, but requested that the Department of Trade and Industry (DTI) give it careful consideration.
The Steering Group is keen to encourage shareholder involvement, but has noted that for this to be effective, shareholders need up-to-date, accurate information. The Steering Group also argued that information should be available more widely to stakeholders (employees, trading partners and the community at large), who may be affected by the company's actions. However, this must be balanced against the burden on small companies of generating formal reports.
Nature of information
If a company exceeds a certain size (based on turnover, balance sheet total, employee numbers), it will need to produce an Operating and Financial Review, covering its business and strategy, developments over the past year, and its future expectations, including any events and trends which may affect performance. The precise requirements would be laid down by a newly-created Standards Board.
Access to information
To be useful, information must be received in good time. The Steering Group strongly recommends the use of web technology. It also suggests that a period should be allowed between this website posting and the sending out of the final annual general meeting (AGM) documents, to give shareholders the opportunity to comment and/or have items added to the AGM agenda, without their having to bear the cost of a separate mailing.
The Steering Group was also concerned about institutional investors, which control the vast majority of major PLCs – it is proposed they be required to disclose to their clients (and potentially publish) how they have exercised their voting powers giving their reasons for voting as they did. Also, while recognizing that the integrity of the company's register of members is essential, the Steering Group wants to record the importance of other rights-holders and allow them an input – although they give no details on how to achieve this.
Reconstructions, mergers and takeover offers
The Final Report of the Department of Trade and Industry's Company Law Review contains proposals in relation to three sets of provisions designed to facilitate company restructuring – Part XIII (arrangements and reconstructions); Part XIIIA (takeover offers) and sections 110 and 111 of the Insolvency Act 1986 (acceptance of shares as consideration for sale of company property in voluntary liquidation).
Statutory merger procedure
The committee proposed that a statutory merger procedure should be introduced whereby a company forms a wholly-owned subsidiary to acquire the assets and liabilities of another target company, the target is dissolved and its shareholders receive shares in the subsidiary by way of payment. A non-court supervised procedure should be introduced for mergers of wholly-owned subsidiaries with their parent company or fellow wholly-owned subsidiary.
Part XIII and section 110 provisions
The committee considered proposals for greater consistency between Part XIII and the section 110 provisions but concluded that continuity of the existing provisions was more important than uniformity. Nevertheless, the committee made proposals in respect of Part XIII in relation to the constitution of class meetings, court supervision of class meetings, the majority required at such meetings and the timing of capital reductions. It also made proposals in relation to valuation in section 110 schemes.
The committee closely considered the provisions in Part XIIIA enabling an offeror, following a takeover offer accepted by shareholders holding 90% or more of the share capital in respect of which the offer has been made, to acquire compulsorily the remaining shares under the same offer terms. The committee made a number of recommendations with regard to the following:
- the definition of 'takeover offer' and 'contracted to acquire';
- conditional contracts;
- irrevocable undertakings;
- notices to shareholders that do not have a registered address in the UK;
- determining the 90% threshold;
- the treatment of options;
- time limits;
- mix and match offers; and
- notification of applications to the court.
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