Government reforms Company Law Reform law

The changes address directors' duties, reporting requirements and derivative claims. They also clarify the position on liability for disclosures under the Companies Act and for implementation of the EU Transparency Obligations Directive. Draft clauses on a proposed regime for liability have been issued today for a short period of public consultation.

Alun Michael, Minister for Industry and the Regions said: "Our aim has always been to encourage meaningful strategic, forward-looking information to assist shareholder engagement while avoiding disproportionate burdens on business, in line with our better regulation agenda."

On directors' duties, yesterday's amendments seek to put beyond doubt that the need to have regard to certain factors (including the interest of the employees and impact on the environment) is subject to the overriding duty to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

The Government also proposed new powers relating to derivative claims including a requirement for the courts to dismiss non-meritorious applications at an early stage.

Summary of changes

Directors' duties

On directors' duties, amendments have been introduced to put beyond doubt that the need to have regard to certain factors (including the interest of the employees and impact on the environment) is subject to the overriding duty to act in the way he considers, in good faith would be most likely to promote the success of the company for the benefit of its members as a whole. The list of factors is not an exhaustive list of the matters that may be considered by directors. The phrase "so far as reasonably practicable" in the clause has been deleted in the light of concerns as to what it implied.

Narrative reporting

The requirements have been streamlined with the requirements for quoted companies being more closely aligned to those for unquoted companies. All companies (other than small) will need to produce a Business Review.

Quoted companies will need to ensure that, to the extent necessary for an understanding of the development, performance or position of the company's business, their Business Review includes:

(a) the main trends and factors likely to affect the future development, performance and position of the company's business; and

(b) information about

(i) environmental matters (including the impact of the company's business on the environment),

(ii) the company's employees, and

(iii) social and community issues,

including information about any policies of the company in relation to those matters and the effectiveness of those policies.

If the Review does not contain information on (i) (ii) or (iii) above, it must state so.

Compared to the earlier Operating and Financial Review (OFR) provisions, the new arrangements are that:

• Auditors will continue to be required to report on the consistency of the Directors' Report with the annual accounts (as is required by the Accounts Modernisation Directive) but there will not be any additional requirement to check for other inconsistencies that auditors may come across in performing their role as auditor;
• All companies that now have to produce a Business Review will be exempted from disclosing information that is seriously prejudicial to the company's interests. This exemption was previously only provided for companies that had to produce an OFR; and
• There will not be any statutory reporting standards for the Business Review.

Derivative claims

The Government proposes amendments to the clauses relating to derivative claims (under which a shareholder, acting as the company, may bring an action against a director for breach of duty), in particular, to require the courts to dismiss non-meritorious applications at an early stage.

The new clauses seek to:

• introduce a two-stage procedure for permission to continue a derivative claim;
• give the courts an explicit power to adjourn the permission application;
• require the Court to take into account any evidence before it as to the views of members who have no personal interest, direct or indirect, in the matter; and
• provide express power to make consequential orders that could include costs and civil restraint orders.

Liability

The new draft clauses on liability will leave in common law that directors remain liable only to the company for statements contained in the annual accounts under the principles laid down in the Caparo case.

For narrative reporting under company law, the clauses specify that:

• Directors should only be liable for statements or omissions in the directors' report, directors' remuneration report and any summary financial statement derived from those reports, if such statements are untrue or misleading and are made in bad faith or recklessly;
• Directors should also be liable for deliberate and dishonest concealment of material facts;
• Directors would be liable only to the company.

For disclosures under Takeover Directive (TOD) implementation, the new clauses specify that:

• Issuers, whose securities are traded on a regulated market should be liable for statements disclosed as required under TOD implementation;
• Issuers should only be liable if such statements are untrue or misleading at the time, and are made in bad faith or recklessly, or there is deliberate and dishonest concealment of material facts; and
• Issuers would be liable to an individual investor or other third party only if he had reasonably relied on the statement for investment purposes, and suffered loss as a result of the statement or omission.

Liability for directors' report statements in non-Company Law Reform Bill contexts, e.g. in prospectuses would not be affected.