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A once in a lifetime opportunity11/10/2006. Source: SJ Berwin. Simon Witney
 When a government decides to re-write its company law, says SJ Berwin, the business community probably has a once-in-a-lifetime opportunity. Company law - the framework of rules that regulate how hundreds of thousands of businesses operate - is not often the subject of radical reform. More usually, it is tweaked to add safeguards when scandals or loopholes prompt action.
That tends to add complexity and red tape. Only very rarely does the law get stripped back to its bones, and re-built with the needs of business at the top of the agenda.
But, in 1998, the British government announced that that was exactly what it was going to do. Pronouncing UK law as “outdated” and built on constructs more relevant to the nineteenth century than the twenty-first, the newly elected administration said that it would “think small first”, and streamline company administration for the vast majority of businesses. It would sweep away unnecessary and burdensome regulations, and strike a new balance that would liberate successful and honest businesses from arcane rules.
Next month in the British Parliament the long, slow process will finally come to an end, and a new Companies Act will make its way onto the statue books shortly after. It will probably be another year before it comes into force, but when it does it will certainly herald significant change - and most of it for the better.
The private equity community will be an important beneficiary of the reforms, and has - on the whole - welcomed the draft law. Life should be a bit simpler - and cheaper - after the reforms come into effect, although for the most part the change will not be revolutionary.
But there are still some important debates to be had, and the battle lines have been drawn for a final showdown in October. The process (although disappointingly slow) has, by and large, been a good one so far - wide consultation, and a genuinely responsive approach from the government. The remaining issues, though, are of great importance to the business community and there are many who hold legitimate concerns.
Perhaps the most concerning proposal is the attempt to write the duties of directors into the law, and to clarify very complicated rules about when directors can be sued. Both of those aims are laudable. The problem is that the way that the new rules are drafted will make the duties more onerous, and could make it easier for shareholders to sue. Whether that is what the government intends is not entirely clear, but lawyers say that is the result.
At the core of the argument on directors’ duties is the statement - to be written into the law - that boards should have regard to the interests of all stakeholders when taking decisions.
In fact, of course, any good director will do that already, and to do otherwise might even be negligent: if a particular course of action will alienate the workforce, then any half-decent board would pause for thought before committing the company to it. But that is not the same as saying that the company should not do it anyway if it is the right thing for the company as a whole; and it is a very long way from saying that an employee could sue the directors if they did. The new law - according to the Government - says neither of those things.
In fact the Government says that the new law will not go further than the existing one. Directors will be accountable only to shareholders for their actions, and their duty is to promote the success of the company.
But if it is easier to sue them, and if the law clearly says that they have duties to think about the interests of a range of people before acting, many worry that litigation will ensue - destabilising business and discouraging people from serving on boards. That would certainly be troubling, not least for the private equity community.
Simon Witney
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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