Thinking Small Makes for Large Changes

The Journal (Newcastle, England), March 8, 2006 | Go to article overview

Thinking Small Makes for Large Changes


Byline: By Howard Walker

The biggest shake-up in company law for 20 years is due to hit the statute books in 2006. Howard Walker looks at the likely effects on North-East business and whether it will be a case of reform or just more red tape.

Little is calculated to make the average company director run a mile more than the thought of new legislation.

And when that legislation promises to be the most wide-ranging to affect businesses for two decades, that mile is likely to turn into a marathon.

However, the Company Law Reform Bill claims to be different. The bill, which is due to become law later this year, was compiled following an Independent Company Law Review which made 150 recommendations on how the rules and regulations governing company activity could be improved.

Their proposals were based around better regulation and a "Think Small First" approach to be mindful of the impact of legislation on small businesses; making it easier to set up a company; encouraging shareholder engagement and "a long-term investment culture" and providing more flexibility for the future.

The result of these recommendations is a bill which is claimed to offer a total estimated saving of pounds 250m to UK businesses.

New laws which make things easier and save money? Is such a thing possible? Well, the answer in some cases would appear to be "yes".

For example, the bill proposes to simplify and streamline a lot of the decision-making processes for small businesses, making the "Think Small First" mantra a reality.

Small companies will no longer have to hold an annual general meeting, unless shareholders insist on one.

Also, more fluidity should be introduced into the process of mergers and acquisitions as the bill proposes that there will no longer be a prohibition on private companies providing financial assistance when it comes to buy-outs.

"This should be a real boost for the buy-out market in the North-East where small buy-outs are prevalent," says Emma Sewell, associate in the corporate department at Newcastle law firm Ward Hadaway. "Currently the whitewash procedure adds significant expense, which can make some MBOs economically unviable."

These sort of proposals have met with almost universal approval from groups including the North East Chamber of Commerce and the CBI.

"We strongly support the vast majority of the bill's proposals and we think that modernising the law will make business more accessible, less bureaucratic and less costly," says Sarah Green, regional director of the CBI.

However, there is an unspoken "but" ( other aspects of the bill are more controversial.

These are centred on the area of directors' duties and corporate social responsibility and are aimed at making companies more accountable, not only to their shareholders but to employees, suppliers and for the impact their business activities has on the environment.

Emma Sewell explains: "The bill proposes to codify directors' duties. Many of these proposed statutory duties reflect the current position but there are new duties placed on directors such as acting in a way that is most likely to promote the success of the company for the benefit of its shareholders as a whole.

"This new duty means that the director must, so far as reasonably practicable, have regard to the likely long term consequences of his actions, the interests of employees, the need to foster relationships with suppliers, customers and others, the impact of operations on the community and the environment, the desirability of maintaining a reputation for high standards of business conduct and the need to act fairly between members of the company."

Quite a list to consider when you're deciding where or whether to place a new contract.

Added to this provision are proposals for new statutory rights for shareholders to bring actions against directors on behalf of companies, all making corporate social responsibility something rather more than a few warm words at the end of the annual report. …

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