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Analysing the Practical Aspects of the Companies Act 2006


5th September 2007

Jonathan speaks to the Chartered Secretaries Professional Practice Group 6th Annual Technical Conference

Overview

I am delighted to be addressing your conference today - and I take a significant amount of satisfaction that it was due to the amendments that the Conservatives tabled at committee stage of the Companies Bill that the role of Company Secretary has been retained for private companies. Having worked in corporate law for some 20 years - no-one needed to persuade me of the value of a decent Company Secretary to the running of a Company.

The hardest question, but one that I received regularly during the course of the Companies Bill through Parliament, was will this Act work or will it be good for business? At 1,300 clauses long, covering a huge number of subject matters of varying novelty and complexity - the temptation is just to say - for the most part - yes. I do think it is an improvement on the 85 Act - although there are various issues where the jury is still probably out. One of the key ambitions of the Bill was to separate the private and public regimes and present the Act in a more user friendly way. The general feedback that I receive is that this has been accomplished - although, again, more comments are likely to come through following the October implementation. And despite the implementation SIs being amongst the most technically challenging that I have ever seen, it would be fair to say that I have not been receiving many complaints - which would seem to point to an effective DBERR consultation.Of course, other than facilitating home grown enterprise, the UK is undeniably now the location of choice for many international businesses - not least those dealing in global financial services. How is the new Act likely to affect our hard-won success? I shall highlight some of the main issues that have arisen and some pointers for where the main pressure points are likely to be.

The first point would be that we will have to be very careful that the Act does not create more unnecessary red tape and bureaucracy. For you, as company secretaries, one feared outcome is the increase in the volume of paper which you may have to generate in relation to board minutes, for instance, evidencing that directors have properly promoted the "success of the company". These measures could make compliance with the law into more of a time-wasting tick-box approach not least because the Act does not give clarity as to how to evidence such decision making processes.

Corporate Governance and regulation

With regard to the regulatory environment, it is important for the UK to recognise our strengths and work at maintaining them. For example, the UK's "light-touch" regulatory approach was recognised during the course of the Act as key to attracting international businesses to Britain and stopping British businesses relocating offshore. Britain is now generally seen by international investors as a more welcoming regulatory environment than the United States. During the lead up to the Companies Bill, the US passed the Sarbanes-Oxley and Patriot Acts. The wide criticisms of Sarbanes-Oxley coming out of the U.S. were helpful from our point of view in dispelling moves from the Unions and the Left to adopt a more prescriptive approach to directors' duties and corporate governance in the Act.

The UK is consistently the clear leader in global corporate governance rankings and our regulatory standards are ones to which many foreign companies apply - but we need to keep in mind - that this position needs to be worked at. We need to be watchful that further regulation coming from pressures within Parliament or Brussels does not strangle or stifle innovation. There is still some cause for concern here as we wait and see how effectively the new duties of directors and the provisions relating to the Business Review work. But, for the most part, the Bill recognises that the right place for corporate governance is the Combined Code for main list companies - operating on its comply or explain principles.

The Companies Act originally included provisions for the now defunct Operating and Financial Review which instituted a mandatory non-financial reporting regime for listed companies. The Government proposed it, then they pulled it and then they half proposed it again and then finally amended the Business Review provisions in clause 417 only two days before the Bill's final reading and then with no consultation. This I could see was no way to move ahead on promoting corporate responsibility in any sense of the term - let alone on a consensual basis. I was therefore delighted when David Cameron asked me to form a Conservative Responsible Business Working Party to review this important area. And one of the basic things that this initiative is questioning is whether legislation and regulation are necessarily the best ways to institute improvements in responsible business practice? This did fit within my experience of working on the Companies Act.

One of the lessons which I learnt from the shenanigans of the OFR review, was that while it was obvious that Government could retain the role of co-ordinator - promoting responsible business much more could productively come from business itself. This issue is likely to form one of the key ongoing areas of political discussion in relation to the Act as there were many on the Labour benches who wanted a more prescriptive mandatory reporting approach. We supported a more measured and voluntary approach - looking to encourage best practice rather than drive standards down to the lowest common denominator and the tick box mentality implicit in mandatory reporting. However, the Minister did announce that Government will review this issue in two years time - so it is very much a live issue. To that extent, I would hope that as voluntary corporate responsibility initiatives become increasingly widespread and more publicised, the culture of corporate responsibility, which would include voluntary reporting, will spread. Corporations and professional practices that involve themselves in best practice CR now - will be ahead of the game - and I predict that this will become much more of an issue demanded from customers and clients in years to come. So if I leave you with a message today - can I suggest understanding and acting on CR now rather than waiting for Government imposed mandatory reporting. In practice, many elements of CR will currently be carried out, even if not articulated, by your firms and your client companies. This is because good CR is invariably linked with good business and this approach should be complimentary to the basic premise, that is under attack from the left, that a company's first duty remains to shareholders. So I shall address some themes relating to company members.

Shareholder's rights

The question of shareholder security was not addressed in the Bill, until the Lords stages following opposition pressure, and then significant amendments were introduced mainly as a result of the activities of animal rights activists and so-called illegal share selling boiler rooms, which some of you may have experience of. It was however decided by Parliament not to go down the route of restricting access to companies' registers of members, in an attempt to maintain the good traditions of shareholder transparency. The new provisions, in clauses 113-121 which come into effect in October 2007, therefore have a presumption of access - with companies then having the right to ask the court to restrict access. However, the complimentary provisions which will provide that companies will only have to notify significant shareholders in their annual return will not come into effect until 2008. Yet, under transitional arrangements, the 85 Act provisions continue to apply to requests for a copy of or to inspect a company's register of members until the company has submitted an annual return made up to a date after 30 September 2007. How these provisions will work in practice will be interesting.

I understand that this impracticality is due to Companies House needing some 15 months to reset its systems. This, by the way was the same reason given as to why directors' historic home addresses could not be deleted - despite the director being allowed on to the private register. Perhaps our Companies House representatives could clarify the issue here.

The Government also conceded to pressure from investors and opposition parties introducing what is now Part 9 of the Act to give voting and information rights to beneficial owners of fully listed shares who are not on the shareholder register because their shares are held in the name of a nominee. I calculated at the time that over 50 per cent. of all private shareholdings were administered by nominees which corresponded to an estimated



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