Out-Law / Your Daily Need-To-Know

Government consults on exceptions to curb on use of corporate directors in business

Out-Law News | 28 Nov 2014 | 10:55 am | 3 min. read

The use of companies as directors of other companies should be restricted in the UK to businesses with shares listed on the stock exchange, the government has proposed.

The Small Business, Enterprise and Employment Bill current before the UK parliament contains provisions which would require UK businesses to ensure that all company directors were individuals. The government has said that the existence of corporate directors in a business, where a business rather than a person acts as a director, can restrict transparency, help to mask illegal activity, and ultimately negatively impact on the economy.

However, it has also admitted that corporate directors can aid business efficiency, and has said that listed companies should be allowed to use corporate directors because they are otherwise well and transparently governed.

The Bill, which followed the publication of a report by BIS in April that looked into corporate control by corporate directors (74-page / 548KB PDF), would allow the government to legislate to provide for exceptions where corporate directors would be allowed.

The Department for Business, Innovation and Skills (BIS) has now opened a consultation on the types of organisations that the exceptions should be applied to (29-page / 159KB PDF).

Corporate law expert Martin Webster of Pinsent Masons, the law firm behind Out-Law.com, said: "The UK government has found itself under pressure from other major economies to improve some aspects of corporate trust and transparency and to ensure individuals can be held accountable for business decision making. Corporate directors are not seen as transparent, although there are some perfectly legitimate reasons why companies use them."

"Corporate directors can be an aid to business efficacy and efficiency, allowing different people to represent the director and attend meetings. It’s a sensible and flexible solution often used in groups and by private equity and pension funds," he said.

Under the BIS plans, UK companies with shares trading on regulated or prescribed markets, such as the LSE or Alternative Investment Market (AIM), would be allowed to have corporate directors.

BIS said: "On the basis of high standards of corporate governance and transparency, we are minded to use regulated market listings as a basis for an exception from the prohibition of corporate directors". It said "there is a case for using overseas regulated market listings of UK companies as a basis for an exception from the prohibition of corporate directors" too.

In addition, BIS said it was in support of allowing corporate trustees of pension funds to have corporate directors.

Pensions expert Alastair Meeks of Pinsent Masons said: "Many professional corporate trustees are appointed to pension scheme trustee boards. Some of the pension scheme trustee boards are themselves incorporated. There is no obvious public policy reason for disturbing such structures."

"In some cases the professional corporate trustee is vested with unilateral powers to provide member protections. Requiring such structures to be reorganised is potentially highly disruptive of such member protections. I hope that suitable exemptions are put in place for the use of professional corporate trustees sitting on pension scheme trustee boards," he said.

However, BIS said that it is harder to justify extending the exceptions to other types of organisations. It has asked stakeholders for their views on whether to apply the exception to public companies without shares admitted to trading, large private companies as well as some charities and companies in other regulated sectors.

BIS admitted that there is a case for allowing all the companies within a group to have corporate directors if the parent company in the group qualifies for the exception. However, it said that it does not "consider the existence of a group structure, in and of itself, to provide sufficient grounds to allow corporate directors to be used".

It said "the nature of the subsidiary; the relationship between the subsidiary and the parent and the nature of the parent" need to be considered before a determination of whether the exception should apply to all companies in a group is made.

BIS said that there is a clearer justification for group companies to be allowed to have corporate directors where the subsidiary company is dormant, where the subsidiaries are wholly-owned and where the corporate director appointed by a subsidiary company is the group's parent company or another company within the group.

BIS said it might, however, require companies appointed as corporate directors of another company to themselves have only individuals as directors of their company.

Limited liability partnerships (LLPs) would be allowed to continue using corporate directors under the new plans, although BIS said that it would review that decision if there was "compelling evidence" that corporate directorships at UK LLPs were being used to mask illict activity.

The consultation closes on 8 January 2015.