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Simplifying company law03/08/2005. Source: SJ Berwin.
 For private companies and their investors, unnecessary regulation is a real headache - and one that seems to have got worse in recent years, despite high profile pledges from successive Governments to cut red tape, says SJ Berwin. But even weary cynics agree that there is much to be said for the present UK Government's drive to simplify British company law.
When they embarked on the review process some seven years ago, the British Government said that they wanted to "think small first": that is, to shape company rules according to the needs of smaller businesses, and then graft on additional safeguards for larger businesses only. That is a fundamental shift, because company law developed the other way - originally designed for very large businesses and gradually adopted by smaller ones. Now the vast majority of companies are small, and they find that the company law framework is unnecessarily bureaucratic and burdensome.
It has taken too long to reach this point, but the newly elected Government in Britain re-stated its pledge to modernise the law in May, and is aiming to start the Parliamentary process for a new law in the Autumn. Given the false starts we have already seen, there is certainly no guarantee that they will achieve that but, if they do, we could see a fundamental change in company law - the first radical overhaul in over a century - early next year.
Many of the changes will focus on the administration of private companies, and the intention is to make that simpler. For example, there will be no compulsion to appoint a company secretary, no need to hold annual meetings and much more sensible rules on notice periods for any meetings that are held.
It will be easier to form a company - although the UK already stands out in Europe in having one of the most straightforward regimes for company formation - and it will be easier to issue new shares, and to reduce share capital. It will be possible to pass resolutions more quickly and easily in writing, with only the requisite majority having to sign, not all shareholders.
These changes will have some value for private equity backed companies, but the cost saving is likely to be marginal. Much more significant for the industry will be the abolition of the prohibition on financial assistance for private companies.
The Government reckons that this long overdue reform will save business £20 million each year in legal fees, and it will certainly make buy-outs easier, faster and cheaper to do. It will avoid some uncertainties and tedious legal debates on venture financings too.
There are still some problems with the draft law - much of which has already been published for consultation. One particular issue is the draft code of directors' responsibilities. The Government is arguing, quite rightly, that directors' duties are inaccessible and, in some areas, unclear.
They propose to re-state them in a statutory code. The problem is that the code itself is not yet satisfactory, and would lead to uncertainties if enacted in its present form. One particular problem is that the proposed duty for directors to avoid conflicts of interest may cause difficulties for those who are, or would like to be, directors of more than one company - a common situation in the private equity world.
But there is time to iron out these problems, and the highly consultative approach that the Government has taken should make this possible. All in all the reforms would represent a welcome overhaul of the law, and would be de-regulatory. It is to be hoped that the process will not drag on for too much longer.
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com
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