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26 February 2014
The Company Law Reform Bill put before Parliament on 3 November is a major piece of legislation in terms of both volume and importance. It has been heralded by the Government as deregulatory, stripping away outdated rules and generating £250m in annual savings for businesses, particularly private companies. It simplifies existing law and removes red tape for small businesses: company secretaries are no longer necessary, companies can be formed more easily, communication by email is acceptable, and share certificates are electronic.
The bill has codified and simplified the common law duties that directors owe companies. This will undoubtedly lead to an increased accountability of directors to shareholders. The bill uses simple language: directors are to promote the success of the company; to exercise independent judgement; to exercise reasonable care, skill and diligence; to avoid conflicts of interest; not to accept benefits from third parties; and to declare any interest in a proposed transaction or arrangement. The latter two duties apply to former directors as well and all duties apply equally to shadow directors. Although companies can be insured against liability from breaches by directors, directors cannot be contractually exempt from any liability arising from negligence.
There is much speculation about the potential increase in litigation arising out of derivative actions. The bill enables shareholders to bring actions against directors for breaches of duty and trust and for negligence. Could this lead to an increase in US-style class actions or securities litigation? In my opinion, this is not a concern. The whole process of derivative actions falls under the close supervision of the court, which now has clearer guidelines. This should ensure that deserving cases are dealt with efficiently. However, unmeritorious claims by shareholders seeking to obtain some advantage over management, other shareholders or stakeholders, will continue.
The bill identifies the various interests directors have in fulfilling the duties to: promote the success of the company; promote the long-term interests of the company and the interests of employees; foster business relationships with suppliers and customers; realise the impact in the community and on the environment; and maintain high standards. It also identifies the need for members to act fairly. In certain circumstances, the directors will also have to consider the interests of creditors. This means that both directors and shareholders can better evaluate the contribution of directors, thus avoiding oppressive litigation.
The bill also limits shareholders' capacity to litigate against directors in order to seek gains contrary to the interests of other shareholders. Likewise the courts will prevent actions which are not in good faith or are incompatible with the best interests of the company. This can be seen in the context of a jurisdiction that has little appetite to allow an uncontrolled compensation culture to take hold. Witness to this is the proposal for a compensation bill reining in ambulance-chasers and claims-farmers. Similarly, it is not irrelevant that business and legal communities have been largely in favour of the results achieved in the BCCI and Equitable Life cases in the last few weeks.
This pro-business approach is also reflected in the confirmation of the 'true and fair view' test in relation to the production of annual accounts by directors and auditors, and the possibility of the contractual limitation of auditors' liability, subject to acceptance by the client's shareholders.
It is true that until things settle, directors' and officers' policy premiums will rise, and the number of individuals willing to accept directorships may decrease, but the bill should contribute to a more stable business environment and less unnecessary litigation.
Ioannis Alexopoulos, partner DLA Piper Rudnick Gray Cary