Lawyers query Company Law Reform Bill proposals

Lawyers have welcomed the publication of the new Company Law Reform Bill, but doubts remain over some of its proposals.

Freshfields Bruckhaus Deringer partner Vanessa Knapp chaired the Law Society’s consultation committee for the bill until August 2005. She believes a clarification of directors’ duties is necessary to avoid conflicts of interest.

The bill states that directors should make decisions based on the best interests of the company. But Knapp claims that, if a director’s company faces a takeover bid from another company in which they are also a director, then there is a potential conflict of interest that the bill does not yet directly address. The bill, which was published by the Department of Trade and Industry last week, also includes the ability to cap auditors’ liabilities and provisions to increase shareholder power.

The cap on auditors’ liabilities looks set to have the biggest direct impact on the legal market, with the bill proposing that auditors can limit their exposure to potentially catastrophic claims such as Equitable Life’s £2.6bn claim against auditor Ernst & Young (E&Y), which collapsed earlier this year.

Clare Canning, a partner at Barlow Lyde & Gilbert, who represented E&Y, said: “The proposals recognise the unfairness of the auditors’ position to date and move towards a situation where auditors – like other professionals – can take steps to prevent themselves from being ‘deep pocket’ litigation targets.”

The proposal to give shareholders a bigger say in how a company is managed has prompted fears that there will be a flood of litigation and that it will give institutional investors such as hedge funds greater influence.

Lawyers tried to allay those fears by pointing out that the bill does not introduce any new rules, but does put them on the statute book for the first time. Richard Upland, a corporate partner at Allen & Overy, said: “I don’t see anything in this bill that will expose companies to greater risk of litigation.”