Reform of UK Company Law

John De Lacy

• Publisher: Routledge-Cavendish
• Year: 2013
• ISBN:
  9781135337971
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

With the completion of the DTI-sponsored Company Law Review, the reform of company law has now become a very important subject of study. This new book is a must for all those interested in the development and reform of UK company law.

The book collates the work of leading authorities on company law, including members of the judiciary and the Law Commission, and individuals from the worlds of professional practice and academia. All main areas of company law are covered, including directors' duties; corporate governance; minority protection; ultra vires; company charges; and human rights and the company, as well as a comprehensive analysis of the work of the Company Law Reform Steering Group.

The central purpose of this book is to analyze the current state of play and to note, in particular, the work of the Company Law Review Group. Critical analysis and suggestions on how company law should be reformed are also offered.

PART 1

THE COMPANY LAW REVIEW

CHAPTER 1

A HISTORY OF THE COMPANY LAW REVIEW*

Jonathan Rickford¹

1 PURPOSE AND APPROACH

This essay offers an historical account of the progress of the three-year project set in hand in March 1998 to review the whole of British ‘core’² company law, and to make proposals for its reform. It is said that, when asked to assess the French Revolution, Mao Tse Tung replied that it was too soon to say. Even greater diffidence needs to be shown in such an historical essay written within weeks of the Review’s conclusion, particularly by an author deeply involved in its processes. Accordingly, I shall focus on events and immediate assessment of the direct effects of decisions made. More fundamental judgment of the value of the Review will surely need to be based largely on the quality and performance of any legislation which results. But a factual account and explanation seem likely to be of value while events are still reasonably fresh, as a record and for those considering similar projects.

The essay considers, in chronological order, first, the state of company law in early 1998 (unchanged in substance at the time of writing) and the case for reform. I shall then move on to describe the establishment of the Review and the events of the first few weeks as preliminary issues were resolved. It will then be convenient to track the subsequent structure of the Review, which broadly fell into four stages: the first, Strategic, phase when key principles, strategic thrusts and working methods and the various options for these were identified, analysed, tested and consulted upon; the second, Development, phase, when the results of this work were developed and applied, to produce reasonably firm high-level policy proposals; the third, Completion, phase when reasonably firm conclusions were reached on these matters and co-ordinated to a level where the developed policy outcomes could be proposed as parts of an internally coherent and balanced system. The final phase then took account of consultation on these proposals to produce a complete and firm Final Report, with, it was hoped, sufficient detail in all areas to provide confidence that the recommendations as a whole were sound, coherent and viable.

Each of these four phases culminated in a major consultation document, entitled, respectively (under the common heading Modern Company Law for a Competitive Economy – itself the title of the document with which the department launched the Review),³ The Strategic Framework, Developing the Framework, Completing the Structure and, of course, The Final Report. ⁴ The very widespread and active consultation which followed each document formed part of the basis for the next phase; but the work in hand necessarily continued vigorously while these consultations took place and in each phase more original work was also added to the ongoing process. It is convenient to structure this account around this fourfold framework, once we have examined the background and preliminaries. It will emerge that much of the core of the Review, particularly the process of reaching firm recommendations on company governance (rules about directors, shareholders/members and transparency and information provision) progressed in accordance with the fourfold structure; but it will also emerge that the nature of the subject and the time constraints made it essential simultaneously to progress a number of different topics respectively at different levels of principle and detail. This was necessary to ensure that the various levels of policy mapping and analysis, detail completion and refinement, from high-level policy to more carefully worked out proposals and in some cases fully detailed legislative drafting, were all fully exposed to consultation. Those subjects which were interdependent, related and conditional on outcomes elsewhere also had to be dealt with in an appropriate time frame.

Constraints of time and subject matter also sometimes led to the stages being combined in consultation – for example, the proposals on the institutional structure of regulation emerged at the end of the third phase, without prior publication of significant initial analysis or examination of options (though these were, of course, addressed in the working groups and steering group before the publication).

This all led to subjects being consulted on at particular levels of development at different stages, to the interstitial generation of six further consultation documents on particular subjects at various points, and in the latter stages to two further urgent and informal consultation letters with restricted circulation, to clear up relatively minor matters.⁵ The result was that while some topics were fully developed in draft clauses in The Final Report, others, such as the proposed structure for regulatory institutions, had, even by then, reached only the status of firm high-level recommendations. A few, notably company charges and their registration, were still at the initial proposal stage.

From the perspective of the management of the process, this parallel, iterative, and staggered method of proceeding represented the only solution to the problems of the subject matter. It proved, surprisingly, relatively free of fundamental problems in itself. The major issues were of course those of the merits of substantive policy choices; but the process, and the sequence and interrelationship of those choices within it, are inevitably the main theme of this historical account. Methodology also developed as the Review progressed. It will, however, be convenient to give complete accounts of the main methodological topics, the operation of working groups, the consultative committee and the public consultations, when they first arise.

Finally, it is proposed, after this account of the process by reference to its four stages, to offer a few very broad conclusions and observations on what appear at this juncture to have been its successes and failures.

2 BACKGROUND – THE CASE FOR REFORM

By May 1997, when the new Labour Government came to power, it was quite widely (but not universally) recognised that the state of British company law was no longer acceptable. It had, over its 150-year history since Gladstone’s Act in 1844,⁶ which first made provision for the formation of incorporated joint stock companies by registration with publicity, and the critical addition of limited liability in 1855,⁷ been reviewed at approximately 20-year intervals by royal commissions, culminating in the Jenkins Committee of 1962. ⁸ These took evidence on the current problems and made recommendations, typically incorporated into an amending Act, which was subsequently consolidated. This usually led to numerous technical amendments and additions to meet current needs or abuses, but no coherent re-examination of the whole. Very rarely was the basic structure adjusted, or anything, however obscure or outmoded, removed.⁹

The Jenkins Committee proposals themselves were never fully implemented. After 1972 the legislative programme was dominated by the need to implement European Community harmonising directives with primary legislation for this purpose in 1972,¹⁰ 1980,¹¹ 1981¹² and 1989.¹³ Each of these Acts grafted Community law provisions onto the existing code, sometimes with great difficulty in achieving a fit (the first Directive provisions on corporate authority and vires, for example, are still the subject of uncertainty and criticism, after 30 years and two attempts at primary legislation).¹⁴ This was combined with sometimes hasty, and often complex, attempts to add domestic law provisions, often late in the legislative process, to deal with the current corporate scandals. The addition of insider dealing provisions to the 1980 Companies Act provisions on conflicted director transactions and the ‘warehousing’ of shares to the 1981 Companies Act, and provisions on auditor regulation, charges and the private company elective regime to the 1989 Companies Act, are all good examples of the latter trend.

Both these kinds of change, Community and domestic, were often made without considering the implications for other statutory provisions – for example, to what extent did the additional Second Directive provisions on subscriptions require reconsideration of the existing provisions on commissions and discounts? The additions in 1989 to the existing code on the appointment and removal of auditors created a complex minefield of provisions.¹⁵ In some cases the approach to implementing Community obligations led to incorporation into primary legislation of complex, detailed and technical provisions fit neither for Parliament nor the statute book.¹⁶ In others, the domestic law proposals proved so hasty and ill-considered that they were incapable of implementation. The most notorious examples were, perhaps, the 1989 Companies Act replacements of Part XII on registration of charges and s 159A on terms of redemption for redeemable shares. Other provisions, such as the elective regime and written resolution provisions in the 1989 Act, while effective in themselves, paid little attention to their uncertain secondary effects. More minor Community law provisions were added by statutory instrument. Predictably, this paid even less attention to the need to ensure coherent modification of the code and was further bedevilled by the dogmatic adoption of a minimalist approach to implementation of Community obligations.¹⁷

While criticism tended to focus on these more recent legislative attempts at reform, the basic structure of the Companies Act itself showed signs of strain. Victorian language and concepts had become enshrouded in mystery in some cases;¹⁸ the episodic reforms propounded by the various royal commissions were usually sound in themselves, but this was by no means always the case; some showed an absence of principled thought which ultimately turned the legislation, and, in one notorious case Community Law as well, septic; others were attractive but proved unworkable – a defect which might have been remedied by more comprehensive consultation.¹⁹ Already by 1979, Professor Gower²⁰ had reached the conclusion that our company law was ‘in greater disarray than at any time this century, both in content and in form, and likely to remain so’, a view which grew stronger with the adoption of the subsequent legislation.²¹

In short, by 1997 our company legislation was in many parts an incoherent, overdetailed and inaccessible jumble of provisions, many of them outmoded, deriving from the vicissitudes of our economic history since the Victorian age. Moreover, much of our company law was to be found in voluminous and contentious (and therefore costly) case law, in many cases with an even longer history and even less pertinent provenance.²² While the law still worked surprisingly well in terms of legal certainty, the case for a radical review was widely recognised as overwhelming, not least because with each new legislative and judicial overlay the problem of achieving a coherent and accessible body of law was becoming technically and politically more difficult. Other countries had, by now, judged the British model of company law unacceptable. Once adopted by most Commonwealth countries, it had been abandoned successively by Canada, Australia, South Africa and New Zealand, and a similar departure was under consideration in Hong Kong.

The prospects for add...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• CONTRIBUTORS
• TABLE OF CASES
• TABLE OF STATUTES
• TABLE OF STATUTORY INSTRUMENTS
• INTRODUCTION
• PART 1: THE COMPANY LAW REVIEW
• PART 2: CONTEMPORARY COMPANY ISSUES
• PART 3: CORPORATE GOVERNANCE AND ACCOUNTABILITY
• PART 4: CORPORATE SECURITY AND INSOLVENCY
• PART 5: FINANCIAL SERVICES AND MARKETS
• APPENDICES